Pound set for worst weekly losses since 2018 after a taxing week.

After several turbulent days in the markets, the British pound stabilised on Friday, though it has been on a steady decline for five weeks, the longest stretch of losses in nearly six years. Investors have grown cautious about the pound due to recent political and economic shifts in the UK, especially as they increasingly favour the U.S. dollar amid uncertainties.

This week, UK Finance Minister Rachel Reeves unveiled her first budget since Labour came to power in July. The budget, which emphasized high taxes, significant spending, and increased borrowing, rattled the British bond market and contributed to the pound’s struggles. Although the market reaction wasn’t as chaotic as during Liz Truss’s brief time as Prime Minister in 2022, the budget did result in a sell-off of British government bonds, or "gilts," which raised their yields. Investors are now less optimistic about the prospect of rate cuts in the UK next year, as the budget’s structure suggests more fiscal strain. Despite these factors, which might have typically provided some support for the pound, the increased financial pressure and high tax burden have sparked concerns about inflation and growth in the UK.

The market is viewing the budget’s large-scale spending as potentially leading to stagflation a situation where inflation and slow growth occur together. This assessment is reflected in the rising UK interest rates. Sterling ended the week up 0.1% at $1.2915, but with a weekly loss of about 0.4%, marking the fifth consecutive week of declines, the longest streak since December 2018. Against the euro, however, the pound saw a slight gain, rising 0.3% to 84.14 pence.

The UK’s Office for Budget Responsibility, which provides economic forecasts for the government, projects that the economy will grow by 2.0% in 2025, a minor increase from the previous estimate of 1.9% in March. Yet, the OBR revised growth projections further down for later years. It also adjusted its inflation forecast for 2025, now expecting it to average 2.6% rather than the earlier prediction of 1.5%. Meanwhile, UK employers have voiced concerns about the increase in social security contributions, a significant part of the additional ￡40 billion in tax that Reeves aims to raise the largest tax hike in a budget since 1993.

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In the U.S., the dollar gained strength against the euro and rebounded against other major currencies on Friday after data showed a sharp slowdown in job growth in October, partly due to hurricane disruptions and strikes by aerospace factory workers. The Labor Department reported a rise in nonfarm payrolls by only 12,000 jobs in October, following a revised figure of 223,000 in September. Economists had anticipated an increase of 113,000. Despite the slower job growth, the U.S. unemployment rate held steady at 4.1%, indicating some resilience in the labor market. Hurricanes and ongoing strikes contributed to the decline in employment growth, with around 41,400 workers on strike at companies like Boeing and Textron when the data was collected.

The U.S. dollar index, which tracks the dollar against six major currencies, recovered by 0.36% to 104.24 after the data release, as markets turned their attention to the upcoming U.S. presidential election, where polls show a tight race between Vice President Kamala Harris and former President Donald Trump. As the election nears, traders are also looking ahead to the Federal Reserve’s policy decision, expected shortly after the vote. The recent jobs report supports the expectation of a modest interest-rate cut by the Fed of 25 basis points, keeping the dollar stable ahead of possible election-related volatility.

Meanwhile, the yen rose earlier in the week due to less dovish comments from the Bank of Japan’s Governor Kazuo Ueda, though the dollar strengthened to 152.94 yen by Friday. Speculation has increased around a possible rate hike by the Bank of Japan in December, though the bank may hold off until January.

In Canada, the loonie, or Canadian dollar, weakened to a two-year low against the U.S. dollar on Friday. Despite positive domestic data showing growth in factory activity, the loonie traded at 1.3950 per U.S. dollar, marking a 0.4% loss for the week. The Canadian dollar may recover in the coming year as interest rate cuts are expected to boost the domestic economy, but the upcoming U.S. election results could have a significant impact, especially if trade policies change under new leadership. Donald Trump, the Republican candidate, has proposed tariffs that could affect Canada, as about 75% of Canada’s exports go to the U.S. Oil prices, a major driver of the Canadian economy, rose to $69.68 a barrel as reports suggested Iran might take military action in the Middle East.

As the U.S. election and Fed decision approach, market volatility remains a concern for many investors. The Fed is expected to cut interest rates by 25 basis points, and investors will watch Fed Chair Jerome Powell’s guidance on future policy adjustments. Although the U.S. economy has shown strength in recent data, the latest jobs report casts some uncertainty, influenced by factors like strikes and natural disasters.

?In the UK, markets are also eyeing the Bank of England’s next steps closely. The bank’s traditional silence period before a rate decision ends on Thursday, and investors are wondering how the recent budget will influence its stance. Goldman Sachs has revised its forecast, now expecting the BOE to hold rates steady, diverging from previous expectations of a rate cut. With yields on five-year gilts now higher than U.S. Treasuries, investors question whether the Bank of England will be swayed by the prospect of increased borrowing and rising inflation forecasts.

Next week’s U.S. presidential election adds further complexity, as investors brace for potential market swings based on the outcome. Markets anticipate that a Trump victory might lead to profit-taking in the “Trump trade,” while a win for Harris could prompt gains in renewable energy stocks. Both outcomes carry uncertainties, especially if the election is closely contested, creating an environment where investors are likely to proceed with caution until the dust settles on these significant events.

The Week Ahead

Here’s a breakdown of the key events and themes to watch for next week across currencies, equities, commodities, economic data, elections, and geopolitical issues:

Currencies

U.S. Dollar (USD): As the Federal Reserve’s rate decision and U.S. presidential election approach, the dollar may experience heightened volatility. Investors are factoring in a likely Fed rate cut of 25 basis points, but any unexpected guidance from the Fed on the future path of cuts could shift sentiment. Additionally, election results, particularly if delayed or contested, may drive safe haven flows into the dollar, with potential gains against other major currencies.

British Pound (GBP): The Bank of England (BOE) will announce its rate decision following the recent UK budget, which raised inflation concerns. Markets will look for BOE guidance on whether it will pause or continue with gradual rate cuts. The pound could face pressure if the BOE leans dovish or if the political uncertainty following the budget persists.

Euro (EUR): Economic concerns within the eurozone continue to weigh on the euro, especially as industrial data remains weak. The European Central Bank’s cautious tone and rising U.S. yields could keep the euro under pressure, especially if the Fed takes a more hawkish pause.

Japanese Yen (JPY): The yen remains sensitive to interest rate differentials with the U.S. and other countries. If the BOJ signals a future rate hike, as hinted earlier, the yen could see a lift, although rising U.S. rates may limit upside moves.

Equities

U.S. Markets: Volatility is expected with both the presidential election and the Fed’s rate decision. Tech stocks, which saw a pullback last month, will be closely monitored for reactions to Fed policy guidance. Additionally, the broader market may be reactive to any election-related uncertainty, especially if a clear winner isn’t immediately declared. If the Fed signals a pause after this cut, it could support equities, particularly growth sectors like tech and communication services.

European Stocks: Markets in Europe may remain under pressure as concerns over slow economic growth persist. High energy prices, low consumer spending, and geopolitical tensions could weigh on sentiment. However, stabilization in the euro could provide some support.

Asian Markets: The Bank of Japan’s recent hints toward a possible future rate hike have made Japanese equities vulnerable to currency shifts, as a stronger yen could weigh on export-heavy sectors. China’s markets are likely to be influenced by any updates on government stimulus efforts and continued signals on U.S.-China relations.

Commodities

Oil: Geopolitical risks are front and center in the oil market, particularly with tensions in the Middle East. Any escalation involving Iran, Israel, or other nations could spike oil prices. Reports of Iranian actions, such as potential strikes from Iraq, could keep prices elevated, adding risk premium. Additionally, U.S. inventory data and output adjustments from OPEC+ will be key.

Gold: Given election and Fed-related uncertainty, gold may attract safe-haven flows. A lower U.S. interest rate environment would generally support gold prices, but any stronger-than-expected U.S. data could cap gains. Additionally, concerns about inflation following recent budget moves in the UK and eurozone could lend further support to precious metals.

Agricultural Commodities: Grain and soybean markets will watch for weather impacts in key growing regions, along with updates on U.S.-China trade relations, which could affect export demand. Any currency fluctuations from election or Fed developments could also influence dollar-denominated agricultural commodities.

Economic Data Releases

U.S. Data: Following a mixed October jobs report, next week’s data will be scrutinized for signs of economic momentum. Key releases include CPI inflation data and consumer confidence figures. CPI data could impact the Fed’s outlook; a higher-than-expected reading may lead the Fed to reconsider its pace of rate cuts.

China: The latest trade balance and industrial production data will offer insights into China’s economic recovery. Weak results may raise expectations for additional stimulus from Beijing, while stronger data could bolster sentiment in Asian markets.

Eurozone: Industrial production data will provide further clues on the economic health of the region. Additionally, ECB officials’ statements throughout the week will be closely watched for any adjustments to the central bank’s dovish outlook.

Elections

U.S. Presidential Election: The U.S. election is expected to dominate global markets, with investors watching closely for a clear winner. A delay in results, contested outcomes, or an extended vote-counting process could lead to market uncertainty. Markets have reacted in the past to so-called “Trump trades,” which anticipate Republican policies boosting domestic small-caps, energy, and industrial stocks, while Democratic policies could benefit clean energy and healthcare.

U.S. Congressional Elections: The outcome of the Congressional races will also influence markets, particularly if control of either the Senate or House changes hands. A divided government would likely mean less aggressive policy changes, which could be seen as favourable for the markets, while a united government could result in more sweeping policy shifts, particularly in healthcare, taxes, and energy.

Geopolitical Issues

Middle East Tensions: As tensions escalate in the Middle East, particularly with recent reports of Iranian threats toward Israel, there is potential for increased volatility in global markets. Any military action or retaliation would likely boost oil prices and could drive safe-haven demand in gold and U.S. Treasuries.

U.S.-China Relations: Trade relations between the U.S. and China remain a focus, especially given both nations’ recent economic policies and tariff discussions. Election outcomes could influence the direction of U.S.-China relations, with potential implications for trade policies and broader market sentiment.

Russia-Ukraine Conflict: Developments in the Russia-Ukraine war will continue to affect energy and grain markets. European markets will be sensitive to any changes in energy supply risks. European leaders are expected to discuss continued support for Ukraine and potential sanctions on Russia, which could impact European energy stocks and commodity prices.

Next week promises to be eventful and potentially turbulent, as multiple major events unfold. With the U.S. presidential election, Fed policy decision, and ongoing geopolitical tensions, markets are likely to experience heightened volatility across all sectors. Investors will be closely watching for any developments that could shift policy outlooks and risk appetite.

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