The Daily Brief

Sterling's Friday rally belonged to the dollar, not to the pound. GBP/USD climbed back to around 1.324 in Friday's session as the soft US payrolls report pulled Treasury yields lower and gilts followed. The 10-year eased to around 5.38% and the 30-year retreated to near 5.89% after Thursday's brief break above 6%. By this morning the pound has handed the entire rebound back, trading near 1.320 as the dollar firmed against the euro overnight. A recovery that reverses within a single Asian session tells you who was doing the buying: short-term positions squaring up after the data, not fresh demand for sterling itself.

The pound cannot hold gains because its bond market is now trading on the budget rather than on the Bank of England. The Chancellor has summoned the chief executives of Barclays, HSBC, Lloyds and NatWest to a meeting tomorrow, the first such gathering of his tenure. Last week's slide in bank shares showed the market already pricing a heavier banking surcharge on 28 October. With roughly 30% of gilts held overseas, a fiscal premium in the long end translates quickly into currency weakness, because those holders are the most likely to cut exposure when domestic news sours. Gilt yields easing on a US data surprise is not the same as gilt yields easing on UK fiscal credibility, and only the second would give sterling a durable floor.

Rate expectations are moving in sterling's favour only on paper. A softer Fed narrows the gap that worked against the pound for most of September. At least one MPC member has also framed the jump in long-dated yields as compensation for inflation risk, not as tightening that does the Bank's job for it, which keeps the November hike case alive. But this morning's final September PMIs land on an economy where the flash survey showed services slowing to a three-month low of 51.7 while input cost inflation rose to its highest since June. Softening growth alongside building price pressure makes hikes more painful and the fiscal arithmetic harder. That is why hawkish pricing has supported gilt yields without lifting the currency.

At 1.320, sterling sits about 0.45% above June's 1.3142 low and roughly 2.6% below the 1.355 at which September began. It remains pinned to the bottom of that range despite Friday's help from the US data. Support is 1.3142; Friday's rebound high near 1.324 is first resistance, with 1.33 the level that would signal the downtrend has paused. Tomorrow's bank meeting and every budget leak can now move the long end, so the balance of risk favours a retest of 1.3142 over a sustained break above 1.33. Only gilt stability with domestic rather than US roots would shift that.

The US economy added just 29,000 jobs in September, around a third of consensus, and revisions removed a further 60,000 from July and August, leaving July showing a net loss. Unemployment rose to 4.2%, partly because participation climbed to a four-month high. Average hourly earnings rose only 0.1% on the month, taking annual wage growth to around 3%. Treasury yields fell sharply on the release, with the 10-year dropping back towards 5.2% from its highest level since 2002. October hike odds, which stood near 36% on Thursday, have since fallen to around 20%. As Friday's brief flagged, payrolls were the swing factor for the 28 October decision, and they swung firmly towards a pause.

Yet the Dollar Index sits near 102.5 this morning, higher than before the data and above the 102 level it first touched on Thursday. The explanation lies outside the US. The euro has slid to its lowest since May 2025, near 1.12, as stress in French government bonds deepens and reports that Spain may be heading for an early election add a second sovereign question mark. The euro also carries the largest single weight in the index. Haven demand has done the rest after weekend claims of missile and drone attacks on Saudi energy sites. A dollar rallying on its rivals' problems rather than its own strength depends far less on Fed pricing, which is why a weak payrolls print has failed to dent it.

The domestic calendar now tests whether that support holds. This afternoon's ISM services index follows a September flash services PMI of 58.7, the strongest in more than five years. Its prices component will be read against the manufacturing prices index that jumped to 77.9 last week. Wednesday's minutes of the September Fed meeting then show how firmly officials stand behind their guidance for one more hike. The wider strategist view captures the tension: an October pause and tighter policy abroad are headwinds, but US growth outperformance and steady foreign demand for US assets keep the risks skewed towards a firmer dollar.

At near 102.5, the index sits roughly 3.8% above its four-month low near 98.7 and about 2.35% above the 100.1 quarter-end model estimate. That puts it at the top of a range that has widened in the dollar's favour for a month. Support is 101.9, Friday's pre-payrolls level, with 101.5 below it; resistance is the round 103.0. The asymmetry has changed shape since Friday but not direction. A firm ISM prices component would revive hike pricing on top of euro weakness and push the index towards 103. A soft print is more likely to slow the dollar than reverse it, because a move back below 101.5 now needs calmer European bond markets as much as softer US data.

South Africa learns today how much of the oil shock lands at the pump on Wednesday, and every projection points to the highest fuel prices in the country's history. Month-end Central Energy Fund data implies increases of around R3 a litre. That would take inland 95 petrol to roughly R30 against a previous record near R28 set in June, with 0.005% diesel heading towards R33 wholesale. The rand steadied in Friday's session, with USD/ZAR easing to around 16.64 as soft US payrolls lifted risk appetite and the JSE Top 40 gained about 0.8%. But the currency still finished a fourth straight weekly loss and has surrendered that gain this morning.

The rand's role in that arithmetic has flipped from shock absorber to amplifier. Through most of September a firmer currency offset part of the oil-driven under-recovery in the fuel price. The slide from around 16.40 towards 16.70 over the past fortnight erased that cushion by month-end. Exchange-rate moves now feed straight into the basic fuel price, and from there into transport, food and the input costs that manufacturers flagged as reaccelerating in last week's PMI. A currency that weakens because oil is high, and then makes the oil shock worse in rand terms, is the feedback loop the market is now pricing.

Policy offers little relief. The Reserve Bank's guidance after last month's hike points to rates holding broadly steady for around a year. That leaves the SARB positioned neither to lean against a second-round inflation impulse with further tightening soon nor to support the currency with it. Headline inflation was 4.4% in August, and the fuel increases now landing make higher prints in the coming months the base case rather than the risk. This morning's S&P Global PMI adds a read on whether the private sector can absorb the cost shock. With the 10-year bond yield near 9.0% and local data gaining little purchase on the currency for a week, offshore drivers will keep setting direction.

USD/ZAR at 16.73 this morning sits about 0.7% below the late-July closing high near 16.84 and 1.5% below the early-August peak at 16.98. It has added close to nine cents to the rand cost of each dollar since Friday's close. Support is Friday's 16.64, then the former ceiling at 16.50; resistance is 16.84, then 16.98. With oil above $100 and the dollar drawing support from Europe's troubles, a test of 16.84 this week looks more likely than a return to 16.50. A confirmed hit to Saudi output would bring 16.98 into play quickly. The route back below 16.64 runs through easing oil and a softer ISM this afternoon. The fuel price announcement itself is largely known, but its second-round effect on inflation is not yet priced.

Five dollars a barrel below the regional benchmark: that is the discount Saudi Aramco set for November Arab Light sales to Asia over the weekend. It was a $3 cut where markets expected a rise, and the widest discount since June 2020. At the same time Aramco raised prices for Europe. For the largest exporter to compete this hard for Asian buyers implies Gulf export volumes are recovering faster than the war premium in futures suggests. It also lands alongside the G7's agreement on Friday to release up to 100 million barrels of emergency oil and diesel stocks, and an OPEC+ decision to leave November output targets unchanged. Supply policy, in other words, is leaning against the price.

The risk premium, however, has not gone anywhere. Yemen's Houthis claimed missile and drone strikes on Aramco facilities in Riyadh and the Khurais field over the weekend, which Saudi authorities have not confirmed. Iranian officials have reportedly signalled they will reject the latest US proposals and keep the Strait of Hormuz closed until their conditions are met. The physical market is making the point more loudly than futures. Dated Brent, the price for prompt cargoes, has traded above $120 even as the futures contract sits far lower, which shows how scarce immediately available barrels remain even as crude flows improve. OPEC+'s core members are still pumping around 5 million barrels a day below pre-war levels.

The cross-asset picture is split by region. Japan's Nikkei is up around 2.5% at a three-month high, led by AI-related stocks and helped by softer Fed hike pricing, in thin trade with China and South Korea on holiday. Europe is the weak link: French government bonds remain under pressure, Paris equities have lagged, and the euro's slide to a 17-month low reflects investors pricing fragmentation risk on top of the energy shock. Gold sits near $4,150 after a 3.4% weekly fall, a sign that haven demand is flowing to the dollar rather than to bullion. US equity futures are modestly firmer ahead of the ISM release.

Brent at $105 sits just above the top of the band between the $95.5 area where it closed in early September and the $104.5 quarter-end model estimate. The asymmetry is unusually two-sided. Saudi discounting, the G7 release and recovering Gulf flows argue for a drift back inside the band. A confirmed hit to Saudi production or a Hormuz escalation would turn $104.5 from ceiling into floor. With the physical market still far tighter than futures, energy-linked costs carry more upside risk than the supply headlines alone imply. A sustained move back below $100 would need diplomatic progress rather than policy barrels.