The Daily Brief

Chancellor John Healey's first Budget did what sterling's options market had priced it to do, which was very little. Fiscal headroom against the stability rule came in at £15bn for 2029-30, down from £23.6bn in March and almost exactly where the working consensus had placed it, and the reaction in yesterday's session was correspondingly small: the pound dipped to around 1.3283 against the dollar, near a two-week low, before recovering towards 1.33 once the Fed had spoken.

The more telling move came at the short end, where the two-year gilt yield fell back to about 4.94% from its highest level since 2023, a sign that the market read the statement as removing a fiscal reason for the Bank of England to do more rather than adding one. The detail underneath was less comfortable than the reaction suggests. The Office for Budget Responsibility now sees a deficit of 4.2% of GDP this year narrowing to 3.4% next, debt interest about £14bn higher this year than planned, growth lifted for 2026 but trimmed for 2027, and inflation not back at target until 2028. Its estimate of the chance that the fiscal rules are met slipped to 56% from 59%.

None of that moved the market yesterday because none of it was a surprise, but it means the cushion that absorbed this Budget is thinner than the one that absorbed the last, and the risk to gilts and the pound has shifted from what the Treasury might do to how much further global borrowing costs rise. That puts the weight of sterling's next move on the Bank of England, which decides next Thursday with a rise in Bank Rate to 4.00% the central expectation. A hike while the Fed waits would narrow the policy gap in sterling's favour, and on paper that is supportive.

In practice, a rate rise forced by imported energy inflation rather than domestic strength has a weaker record of lifting a currency, because it signals squeezed real incomes as much as higher returns, and the OBR's inflation path gives the Bank little reason to frame it any other way. Against the euro the pound is already priced for that support, holding near 83.7p, within a whisker of Friday's 83.63p, its strongest level since May 2025. At around 1.33, GBP/USD sits just above the 1.3273 midpoint of its October range, between the 1.3137 low of 14 October and the 1.3409 high of 20 October.

The Budget has removed the fiscal tail that options were barely paying to cover, and a Bank of England hike is largely expected, so the remaining drivers against the dollar are external: a soft US inflation print this afternoon would give sterling room towards the upper half of that range, while a ten-year Treasury yield back above 5% caps it. The balance of risk against the dollar is now close to even, whereas against the euro, with the pound a fraction from a 17-month high and the ECB unlikely to offer anything new today, the room for further gains is narrower than the room to give some back.

The dollar went into yesterday's Fed decision carrying a premium and has come out without it. The Dollar Index had risen for three sessions to 102.43 ahead of the meeting; it now sits at 102.15, even though the futures-implied probability of a December rate rise moved up from about 78% to around 85% over the same period. That divergence is the clearest read on positioning available this morning. The market had bought the dollar for a hawkish surprise that, in the event, arrived only in the vote count, and the unwinding of that trade outweighed the modest increase in hike pricing.

The decision itself gave both camps something. The vote to hold at 3.75% to 4.00% was 10 to 2, with Governor Lisa Cook and Cleveland Fed President Beth Hammack preferring another quarter-point rise, and the statement upgraded its description of activity to a strong pace while repeating that inflation remains elevated. Chair Kevin Warsh then declined to offer forward guidance, and noted that financial and credit conditions had tightened since September as spreads widened, while describing that tightening as modest.

When a chair credits the bond market with doing part of the work, the bar for the next hike rises slightly, and that is what the dollar sold on. The ten-year yield, holding around 5.00%, is now the variable doing the tightening between meetings. That leaves this afternoon's data with more weight than usual. Third-quarter growth is expected at 3.2% annualised, up from 2.2%, which would validate the statement's upgrade, while core PCE inflation for September is forecast at 3.1% from 3.0% and headline PCE at 3.6% from 3.4%.

A core print at consensus confirms the path the market has already priced; a print of 3.2% or higher would push December towards certainty and probably restore the pre-meeting premium; a print at 3.0% or below would reopen exactly the doubt Warsh left open, and with the US midterm elections next Tuesday, few officials will want to lean against that before December. At 102.15, the index sits just below the midpoint of its recent range, roughly 0.75 under the 18-month high near 102.9 and about 0.55 above last week's low near 101.6.

With a December rise priced at around 85%, a hot print can add at most about 15 percentage points of hike probability, while a soft one has a much longer distance to unwind, so the dollar's downside on a miss is larger than its upside on a beat. The balance of risk into the data therefore leans modestly lower, even though the likeliest single outcome, a core reading at 3.1%, would leave the index close to where it trades now.

This morning's September producer price figures at 09:30 GMT are the first domestic test of how far the fuel shock has travelled through South Africa's supply chain, and the rand goes into them on firmer footing than it held for most of yesterday's session. Producer inflation is expected to jump to 6.5% from 5.0%, a move almost entirely explained by record fuel costs, and it lands after September consumer inflation came in at 4.5%, below the 4.7% expected. The gap between the two is the story: costs are rising faster at the factory gate than at the till, and the Reserve Bank has already warned that consumer inflation is likely to rise above 5% later this year as that pressure works through.

The currency spent yesterday's session trading the dollar rather than the domestic calendar. The rand softened to around 16.68 in early trade as oil climbed on reports of a strike on Saudi Arabia's largest refinery, with the 2035 bond yield up 2 basis points to about 8.60%, then recovered to around 16.62 once the Fed had held without hiking and the dollar gave back its pre-meeting gains. That pattern, a high-beta expression of the global dollar trade with little reaction to local news, is typical when US policy is in play, and it means the PPI number matters less for its immediate effect on the rand than for what it does to the Reserve Bank's next decision.

On that, the arithmetic has shifted. With the repo rate at 7.25% after September's rise, a producer print at or above 6.5% strengthens the case for a further increase at the November meeting, where a move to 7.50% is already the prevailing forecast. A higher policy rate widens the carry that has kept the rand resilient this year, but a hike delivered in response to an inflation shock signals erosion of real returns at the same time, which is why offshore investors have been more willing to own South African bonds, with the ten-year near 8.73%, than to add currency exposure. Brent's 1% fall this morning eases the input-cost pressure at the margin, but not by enough to change October's producer figures.

At around 16.62, the rand sits in the weaker half of its October range, roughly 0.08 from the 16.70 it touched on Tuesday and about 1.5% weaker than the 16.38 reached after the medium-term budget, with R17.00 the level the market treats as the next line if oil and the Fed push together. The setup is better than it was yesterday morning, with the dollar softer and Brent lower, but the balance of risk still leans towards weakness while a December Fed rise sits at around 85% and Brent holds above $110. A sustained move back below 16.50 would need two things at once this afternoon, a soft US core PCE print and oil holding its overnight decline, and neither is the central expectation.

2.50%. That is where the Bank of Canada took its policy rate yesterday, a quarter-point rise that landed a few hours before the Fed chose to wait, and it is the clearest sign yet that the policy response to this year's energy shock is broadening beyond Washington. The ECB decides this afternoon with a hold at a 2.50% deposit rate expected but euro area inflation at 3.8%, the Bank of Japan follows tomorrow, and the Bank of England is expected to raise rates next week. Four major central banks in eight days are answering the same question, and the answers are starting to converge on tighter rather than looser.

Oil is the common thread, and this morning it has eased. Brent is down about 1% at $114.14 after reports that the US vice president had contacted a senior Iranian security official and confirmation that negotiations are running through mediators, though with no assurance of an outcome. That retreat follows a Wednesday session in which Brent reached $116.50 on a reported, unconfirmed strike on Saudi Arabia's largest refinery and on fears of renewed US military action against Iran once next week's midterm elections are over.

The price is still up around 16.5% in a month even though physical energy flows from the region have recovered close to pre-war levels, which means most of today's price is geopolitical premium rather than missing barrels, and premium is exactly the part a diplomatic headline can remove or restore in a single session. The reaction elsewhere is cautious rather than relieved. Gold is down about 0.7% near $4,040, Asian equities are mostly lower on disappointing technology earnings, and US equity futures are off around 0.4% after weak results from Alphabet, so the dip in oil is not being read as a signal to add risk.

Israel's count has tilted towards Prime Minister Benjamin Netanyahu's bloc, though neither side is close to the 61 seats needed to govern and final results are not expected before today, which keeps the regional political picture unresolved for at least the coming weeks of coalition talks. At $114.14, Brent sits about $2.40 below Wednesday's $116.50 high and near the top of a range that started close to $98 a month ago, so the morning's decline has trimmed the premium rather than reset it.

A sustained move below $110 would need a concrete diplomatic step rather than a reported conversation, while the post-midterm window that markets fear opens in under a week, which keeps the balance of risk tilted towards a renewed test of the high. For as long as Brent holds above $110, the central banks lining up this week have their justification for tightening, and energy-intensive importers face a cost base around a sixth higher than a month ago with the skew still upwards.