The Daily Brief

Thursday's Bank of England decision is the event sterling has been trading towards, and Friday's session showed how much of it is already in the price. Markets almost fully price a quarter-point rise to 4.00%, a second increase in February and a third by July, and the pound briefly reached around 1.3432, a six-week high and beyond the 1.3409 October peak, before closing near 1.339 as the dollar steadied. A break that does not hold is informative: with a hike treated as settled and the Budget behind it, sterling needs something more than the decision itself to extend.

That something is the vote and the language around it. The central expectation is a rise with perhaps a single dissent in favour of no change, framed as pre-emptive action against energy-driven inflation that forecasts show moving above 4% next year. A near-unanimous vote with guidance pointing to a sequence would validate the February and July pricing that has carried the pound through October; a split vote, or a message closer to one move and then a pause, would hand back part of a path the curve has already credited. Against the euro the stakes are higher still, because the pound sits around 83.4p, its strongest level in months, and that cross is priced almost entirely on the gap between a hiking Bank and an ECB on hold.

This morning's fall in oil complicates the hawkish case at the margin. The argument for a sequence of hikes rests on energy feeding through to wages and services prices, and a Brent price nearly 3% lower, if it holds, softens that argument just as the Committee writes its statement. Speculative positioning has leaned short sterling for much of the autumn, which gives a genuinely hawkish surprise more fuel than usual, but it also means the market has already done much of its repositioning on the way up to 1.34. Today's final manufacturing PMI, after a flash reading of 52.8, will confirm whether the factory upturn is broad enough to support the Bank's growth narrative.

At near 1.339, GBP/USD sits about 40 pips below Friday's 1.3432 high and roughly 255 pips above the 1.3137 October low, near the top of the month's range. The upside from here needs either a more hawkish vote than expected or a weaker dollar after the US midterms, while the downside needs only a Bank that sounds less committed to a sequence than the curve already is. That leaves the balance of risk leaning towards a drift back to the 1.33 area, around the range midpoint near 1.3285, rather than a clean break above 1.3432, with Thursday's vote split the variable most likely to settle which way it goes.

Positioning, not data, is setting the dollar's price this morning. The Dollar Index sits around 101.9, essentially where it ended a week that included a Fed hold with two hawkish dissents, 3.4% annualised growth and 3.6% PCE inflation, any one of which would normally have moved it. Investors have been trimming dollar exposure into tomorrow's midterm elections, and the Treasury rally sparked by the technology sell-off pulled the two-year yield down about 9 basis points to 4.59% over the week, more than the ten-year's fall to 4.93%. When the front end leads a rally, the market is shaving expected hikes rather than simply seeking shelter.

Friday's employment cost index gave the hike case nothing new. Labour costs rose 0.8% in the third quarter, as expected and down from 0.9%, and the probability of a December hike slipped to around 70% from about 76% a week earlier, with the implied path now two increases, in December and April, rather than three. Wage growth is easing at the margin while headline inflation is being driven by energy, and that split is why this morning's lower oil price matters for the dollar: cheaper Brent weakens the inflation leg of the hike case at the same moment that wages are declining to strengthen it.

Tomorrow's vote adds a political layer to that rates story. Democrats are widely expected to take the House, with the Senate in play, and a clean sweep is read as mildly negative for the dollar through the risk of shutdowns and debt-ceiling standoffs, along with the pressure it could put on already fragile sentiment towards AI-related equities. Liquidity tends to thin ahead of the result, which makes today's ISM manufacturing survey at 15:00 GMT the last real data test before the vote. The headline is expected at 54.7, but the prices component, forecast at 77.5 after 77.9, is the reading the hike debate will watch, and Friday's payrolls, expected at around 65,000 after September's 29,000, close a week in which every scheduled event can move the December odds.

At around 101.9, the index sits inside last week's 101.8 to 102.35 band, roughly a point below its 18-month high near 102.9. With December hike odds at around 70%, there is room in both directions: a firm prices reading or a contained election outcome could push the odds back towards 80% and the index to the top of that band, while a Democratic sweep followed by soft payrolls would test its floor. Into tomorrow the balance of risk leans modestly lower for the dollar, but it is a lean that Friday's jobs report can reverse in a single print, which makes this week's lows a level to measure against rather than one to rely on.

The US is due to announce today whether South Africa keeps its eligibility for duty-free access under the African Growth and Opportunity Act in 2027, and the rand went into the decision on the back foot. It weakened about 0.6% in Friday's session to close near 16.71, through the 16.70 level that had marked its weak point earlier in the week, and it starts this morning around 16.70. Because any removal requires 60 days' notice before it can take effect on 1 January, today is effectively the deadline, which is why the market squared positions into it rather than waiting.

The direct trade stakes are smaller than the headline suggests. About 10% of South Africa's exports to the US entered under the programme last year, worth roughly $1.7bn and about 1% of the country's total exports, so the volume at risk is modest. The market significance lies in the signal: a removal would be read as Washington's verdict on a relationship already strained over land reform and foreign policy, and that is a risk-premium question for the currency rather than a trade-balance one. Retention, on the other hand, would remove one of the two event risks that drove Friday's selling.

The second is Wednesday's local government elections, and together the two help explain why Friday's September trade figures barely registered. The surplus came in at R19.8bn, with exports and imports both up about 5% on the month, taking the year-to-date surplus to R169bn against R117.5bn a year earlier: evidence that export earnings are still covering a heavier fuel bill. This morning's lower oil price adds to that cushion, and it also helps the inflation path the Reserve Bank must now steer towards its new 3% target, while gold's 0.8% bounce towards $3,905 offers modest relief after last week's slide to fresh lows for the year.

At around 16.70, the rand sits at the weak edge of its October range, roughly 0.32 from the 16.38 it reached after the medium-term budget and 0.30 from R17.00, the level the market treats as the line for a broader sell-off. With positioning already squared into the event, a favourable ruling, a calm vote on Wednesday and a softer oil price could carry the currency back towards the middle of the range near 16.55 quickly. An adverse ruling would test 17.00, but given how little trade is directly exposed, the move is more likely to be sharp than sustained. The balance of risk is two-sided on the level, with the downside tail fatter over the next 48 hours.

Two days. That is how long Iran's foreign minister says a Qatar-brokered plan would take to reopen the Strait of Hormuz, with US measures on day one and shipping restored on day two, shortened from an original seven. Brent is trading around $110 this morning, down nearly 3% from Friday's $113.43 settlement, which was the highest since the end of April and capped a 13.6% gain in October. OPEC+ core members kept December output targets unchanged on Sunday, exactly as expected, so this morning's move belongs to diplomacy alone.

The conditions attached are what keep the relief partial. Tehran wants recent US sanctions lifted, oil waivers restored, a reduced US military presence and recognition of new shipping routes, and Washington has said it is in no great hurry. Overnight, Iran's Revolutionary Guards claimed strikes on two tankers using an unauthorised route and a vessel was reported possibly ablaze off Oman, a reminder that Gulf exports are still running well below normal levels while talks continue. The market has trimmed the war premium on the prospect of a deal, not on any change in physical supply, and the risk that a post-election administration hardens its line on Iran keeps a floor of concern under the price.

Equities are dealing with a different problem. The S&P 500 closed Friday at 7,580, down 1.8%, after Amazon and Intel added to Alphabet's earlier miss and deepened doubts over the return on AI capital spending, though futures are up around 0.4% this morning. Asia is mixed, with Japan lower while mainland China and Hong Kong rose on reports that regulators and banks are meeting to discuss support tools for the stock market, and Apple reports after the US close tonight. Lower oil helps the inflation outlook that bond markets have been rallying on, but it does nothing for the earnings question at the centre of the equity sell-off, which is why the two are moving on separate clocks.

At around $110, Brent sits about $3.40 below Friday's settlement and $10 below the $120 that analysts flag as the post-election test if rhetoric towards Iran hardens. A genuine reopening would leave far more room to fall, given the price was around $73 before the war began in late February, but that outcome depends on terms Washington has not accepted. The near-term asymmetry therefore leans towards a rebound into the $113 to $115 area if the talks stall or the election shifts the tone, with a much deeper fall the tail scenario rather than the base case, and the route into currencies runs through importers' fuel bills: every dollar Brent holds below last week's levels eases the pressure on the rand and on UK inflation alike.