The Daily Brief

Wednesday is the day that decides sterling's next move. Chancellor John Healey delivers the Autumn Budget that afternoon, a week before the Bank of England's 5 November meeting, at which markets fully price a first quarter-point hike and at least three by April 2027. The pound ended Friday's session near 1.338, holding most of its gains from the September inflation data, and it starts the week waiting for the Treasury rather than the data calendar to set the direction.

Friday handed both sides of the argument fresh evidence. The flash composite PMI rose to 53.1 from 52.0, well above the 51.8 expected and the fastest growth since February, with manufacturing output at its strongest in just over two years and employment growing for the first time since September 2024. Input cost inflation also reached its highest since June. That combination, firms hiring and passing on costs, is exactly what the Monetary Policy Committee watches for second-round effects. Against it, September retail sales fell more sharply than forecast, a day after consumer confidence suffered its steepest fall since the pandemic.

The Budget is where those two stories meet, and both of its likely failure modes point the same way for sterling. A hard fiscal squeeze takes demand out of a household sector that is already retrenching, which lets the Bank stop after one or two hikes rather than three. A looser package risks pushing ten-year gilt yields, already near 5.37%, higher for the wrong reason, and higher yields driven by a fiscal risk premium tend to weaken the pound rather than support it. Only a Budget that gilts welcome without denting growth leaves the full hiking path intact.

Part of sterling's strength has also been borrowed from the euro. Outflows from French assets pushed money into gilts and the pound through the past fortnight, but France avoided a Moody's downgrade on Friday, removing one source of that flow. EUR/GBP has already edged up to around 0.839 this morning, a sign that the euro-side support for the pound is starting to fade. At around 1.338, GBP/USD sits close to the midpoint between last Monday's 1.333 and the 1.345 level that would mark a break higher.

The route to 1.333 runs through either Budget outcome that unsettles the hiking path, while the route to 1.345 needs a Budget that gilts welcome and a Fed that does not revive the dollar on the same evening. With more ways to the lower reference than the upper one, the balance of risk into Wednesday tilts modestly lower, and the downside move is likely to be the larger if it comes.

The latest US surveys argue against the growth scare that drove last week's bond rally. Friday's flash PMIs showed business activity growth holding close to a five-year high, with manufacturing conditions the strongest since 2022 and services activity still robust, while the final Michigan survey confirmed year-ahead inflation expectations at a five-month high. That is the profile of an economy running hot with inflation expectations drifting up, two days before a Fed that has been leaning towards tightening.

The dollar has not traded it that way. The Dollar Index sits at 101.64 this morning, down 0.17% and extending its slide near three-week lows, while the 10-year Treasury yield holds just below 5% at around 4.97%. The market is still pricing last week's flight into bonds on doubts over AI spending, and pre-Fed position squaring has added to the pressure. The probability of a December hike has slipped to about 76%, from close to 90% early last week, while a hold on Wednesday is close to fully priced.

That gap between the data and the pricing is what Wednesday's decision at 20:00 BST resolves. The Fed is expected to hold at 3.75% to 4.00%, so the signal lies in the statement and press conference: whether December is confirmed or left open. With factory conditions the strongest since 2022 and inflation expectations rising, the case for keeping December live is stronger than the bond market currently implies. The rest of the week then tests the call. September's PCE inflation and the first estimate of third-quarter growth arrive on Thursday, alongside earnings from Alphabet, Microsoft and Amazon that will speak directly to whether AI investment demand is holding up.

The dollar's rate advantage is also being squeezed from the other side, with Canada and New Zealand expected to tighten this week while the ECB and the Bank of Japan hold. At 101.64, the index sits at the bottom of its October range, roughly 1% below the 18-month high it set earlier in the month, with December priced at about three in four. That pricing is the asymmetry: a Fed that validates December can push the odds back towards 90% and the index back towards the middle of its range, whereas a patient tone largely confirms what the market has already sold. The balance of risk has therefore shifted modestly towards a bounce from here, unless Thursday's PCE and growth data undercut the strength in the surveys.

Emerging market positioning is being reset this morning, and the rand is in the same basket. Brazil re-elected President Lula in Sunday's runoff with 51.8% of the vote, after markets had leaned heavily towards a result associated with tighter fiscal policy, and the Brazilian real is expected to give back a large part of its pre-election rally when local trading opens. The rand finished Friday's session near 16.58, about 0.5% weaker on the day, and trades around 16.60 this morning.

The mechanism is portfolio construction rather than any link between the two economies. Offshore investors tend to hold high-yielding emerging market currencies as a group, and a sharp repricing in one large carry currency often prompts a trim across the basket, particularly where fiscal credibility is the investment case. South Africa's case for most of October has been exactly that, built on a medium-term budget that stabilised the debt ratio and cut bond supply, so a reminder that fiscal stories can reverse quickly lands on the rand more heavily than on most.

The oil channel is the second pressure. Brent's close above $116 on Friday added directly to the import bill of an economy that buys in its fuel, and the 10-year government bond yield holds near 8.79%, giving back part of the budget rally rather than extending it. Brent's 2% retreat this morning would normally offer the rand some relief, yet the currency has not firmed on it, which suggests the emerging market channel is dominating the price for now. The domestic calendar offers little shelter in the meantime.

Municipal elections fall on 4 November and the Reserve Bank decides on 19 November, with October's inflation print expected to accelerate after record fuel prices despite the temporary fuel levy cut. Until that data arrives, the rand is trading on external forces it does not control. At Brent's current $114.46 and USD/ZAR at 16.60, a barrel costs roughly R1,900, against about R1,670 at the start of October, an increase of close to 14% in rand terms in under four weeks. The currency itself sits in the weaker half of the range between last Wednesday's post-budget best near 16.38 and the 16.70 area that a renewed oil spike would bring into view. Getting back towards 16.38 needs both Brent to hold below its old May peak and a calm reception for emerging markets after Brazil; reaching 16.70 needs only one of those to fail, which leaves the balance of risk on the weaker side.

$116.72. That was Brent's closing price on Friday, its highest since June 2022 and clear of the $114.44 peak set in May, capping a weekly gain of more than 6% and a third consecutive weekly advance. The move was built on expectations that the US could resume strikes on Iran after the midterm elections, with the US State Department ordering non-essential staff out of Saudi Arabia and Saudi Aramco reportedly moving staff out of its Dhahran headquarters. This morning the price has slipped back to $114.46, down 1.94% and sitting almost exactly on the old May peak.

President Trump said on Sunday that he would soon decide whether to pursue a deal with Tehran or restart military operations, a statement that cuts both ways and has prompted some profit-taking. The weekend added escalation too, with the Houthis claiming to have targeted Riyadh's main airport after Saudi strikes on Yemen. Middle Eastern crude exports have recovered to near prewar levels, which makes the premium a pricing of risk rather than of lost barrels. The tension is visible beyond oil. European gas prices are up around 2% this morning on supply fears, while US natural gas trades near a two-year low, a spread that captures how much more of the energy shock Europe is carrying than the US.

Gold has steadied near $4,009 after last week's slide, US equity futures are edging higher after two weeks of declines, and Asian markets are mixed, with Japan softer and Hong Kong firmer as China's Fifth Plenum gets under way. What makes this week unusual is how many dated catalysts are stacked together. Israel holds elections this week, the Fed and the Bank of Canada decide on Wednesday, the ECB and the Bank of Japan follow, three of the largest technology companies report, and the US midterms fall on 3 November. Each is a scheduled point at which the oil premium can be added to or removed, and few of them are likely to reduce it.

At $114.46, Brent sits on the dividing line of a range that runs from about $102 at the start of October to Friday's $116.72, with the old May peak now acting as the pivot. Holding above it would mark the breakout as consolidating, with a retest of $116.72 a matter of headlines rather than fundamentals; a slide back towards $110 would need the diplomatic option to gain ground, which the weekend's escalation does not support. With the catalysts dated and skewed towards escalation, the balance of risk sits on the upside, and Brent at these levels already embeds a cost base roughly 12% higher than energy importers faced four weeks ago.