Bank of England in spotlight this week
The euro and sterling both lost ground against the dollar last week, shedding around one and two cents respectively (and two and three cents respectively for the month of October), most of this clocked up following Wednesday’s more hawkish than expected Fed meeting. The single currency (at $1.1530) is trading at the bottom end of the $1.15 to $1.18 range that has prevailed over the second half of 2025 to date (save for very brief forays down to $1.14 and up to $1.19), while sterling is trading at its lowest level ($1.3130) against the US currency since April and near year to date lows (£0.8780) against the euro. It is a potentially significant week ahead for the pound, with the Bank of England MPC due to announce its latest interest rate decision on Thursday. While the market is pricing in only about a 25% chance of a reduction in rates, softer than expected inflation and wage data recently could see a sizeable minority of the nine MPC members vote in favour of a cut. This could boost market expectations for a reduction in rates at the December meeting, which in turn could weigh on sterling.
US government bond yields edged down on Friday but still ended around 10bps higher on the week, while German and UK yields were flat and marginally lower respectively on the week. In equity markets, the Nasdaq in the US advanced by 0.6% on Friday to bring its gains for the month of October to almost 5%, while the S&P 500 gained 0.3% on the day and more than 2% on the month. European stocks ended lower on Friday but still gained around 2.5% in October.
The differing views among Fed members regarding the outlook for the US economy, which has made a cut in interest rates at the December meeting ‘far from assured’ according to Fed Chair Jerome Powell, were on full public display on Friday. While some said continuing downside risks to employment warrant another reduction in rates next month, others said still solid economic growth and upside risks to inflation argue for keeping rates on hold. The market, for its part, is pricing in about a 65% chance of a 25bps cut in December.
Headline inflation in the Euro area dipped to 2.1% in October (from 2.2% in September) according to Friday’s ‘flash’ reading, in line with the consensus forecast. Core inflation was a touch higher than expected at 2.4%, unchanged from September, with a second consecutive increase in services inflation (to 3.4% from 3.2% in September and its 2025 to date low of 3.1% in August) offsetting a decline in goods inflation (to 0.6% from 0.8%).
As well as the Bank of England interest rate decision on Thursday, economic data due include the ISM manufacturing and services surveys in the US today and Wednesday respectively, which should garner more attention than usual given the government shutdown-related absence of official data. The University of Michigan consumer confidence survey for November is also due in the US, on Friday, while Euro area retail sales are scheduled for Thursday.