The Federal Reserve’s "hawkish cut" last week seems to have taken markets by surprise.
Both the voting pattern and Chair Powell’s press conference made clear that further cuts are not necessarily the consensus view in the central bank. All asset classes reacted to the surprise in the traditional ways: Treasury yields shot up, credit spreads widened, stocks sold off, and the dollar strengthened against every major currency. Sterling was the big loser in the G10, in large part due to ongoing jitters ahead of this month’s budget. Interestingly, most major emerging market currencies sold-off less aggressively than those in the G10.
There is still no end in sight to the US government shutdown, so no significant economic news is expected from the US for the time being. The only exception will be the private sector counterpart to the payrolls report, the ADP jobs number on Wednesday, which will receive an unusual amount of attention in the absence of official news. The Bank of England meets on Thursday, and Eurozone retail sales will be released Thursday. As usual, these numbers won't shed much light on recent economic trends due to their datedness.
GBP
Bleak trends in UK productivity are expected to trigger a downgrade in the OBR’s growth forecasts ahead of this month’s Autumn Budget. Given Labour’s limited appetite for spending cuts, and the apparent absence of room for further borrowing, this only means one thing: even larger-than-expected tax hikes on 26th November. Rumours that this could entail an increase in income tax rates for higher bracket earners has not gone down well, as this would not only break the government’s campaign pledge, but possibly spell doom for Britain's economy in 2026.
To make matters worse for the pound, some Bank of England officials have been making dovish noises, and markets are now pricing in a 30% chance of a cut at Thursday’s meeting. We still think that the hawks will carry the day and rates will be left unchanged, but there will likely be a handful of dissents in favour of a cut. There is an argument, however, that sterling's steady underperformance is starting to create a buying opportunity, particularly should the budget be less damaging than fears, and the MPC hold rates through year-end.
EUR
A modestly positive surprise in the third-quarter GDP growth report from the Eurozone confirmed the upward trend in activity that has been evident in the latest business sentiment surveys. This upbeat news largely overshadowed what was a completely uneventful ECB meeting on Thursday, in which Lagarde very much stuck to the script, while effectively confirming that the rate-cutting cycle is over - not that markets needed to be told.
Recent Fed hawkishness has sent the euro towards the low end of the 1.14-1.19 range that it has held since June. As the Eurozone economy remains resilient, and as the effects of the massive German fiscal stimulus plan begin to be felt, we think that the common currency is becoming a buy around these levels.
USD
Although the Federal Reserve cut rates as expected last week, and made only very minor changes to its statement that largely reflected the lack of economic data, the message from Powell’s press conference was unmistakably hawkish. He made it clear that another cut at the next meeting in December is far from a foregone conclusion. Further hawkish noises came later in the week from Federal regional presidents who will be rotating into a voting position in 2026. This highlights the disconnect between Fed officials and the market regarding the timing and size of any further cuts.
As we wait for the Federal government to reopen and resume publishing economic data, that looming conflict between the Trump administration and the Federal Reserve is what will likely come back into focus. A big focus in the New Year will undoubtedly be the race to be named as the next Fed chair once Powell’s term comes to an end in May.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- FOMC October Meeting Reaction
- G3 FX Outlook - October 2025
- Latin America FX Outlook - October 2025
