CAPITALDIGEST MARKET REVIEW, 26/10/2026
October 26, 2026
STERLING EDGES UP TO FRESH 17-MONTH HIGH VERSUS EURO AFTER UK DATA
Sterling edged up to a fresh 17-month high versus the euro on Friday, on track for its fourth straight weekly rise, after UK data provided mixed signals about the British economy. The preliminary S&P Global UK Composite Purchasing Managers’ Index rose to 53.1 in October, higher than economists’ forecasts and up from September’s 52.0. Conversely, British consumers reined in their shopping in September, while separate data showed confidence levels plunged in October. The euro was roughly unchanged at 83.70 pence after reaching 83.62 pence, the lowest level since May 2025. BofA said that not all bets against the euro offer the same opportunity, arguing the euro/pound is better priced and that it favours euro/yen and euro/Canadian dollar shorts. Fears of new social unrest in France and elevated energy prices weighed on the single currency while strong UK data and easing fiscal concerns have recently lent support to the pound. British Prime Minister Andy Burnham said on Friday his government’s first annual budget statement due next week will give businesses “breathing space to grow”. “The PMIs have a stronger tone than the recent retail sales and consumer confidence data,” Paul Dales, chief UK economist at Capital Economics, said. “Taken together, the overall economy still seems to be weathering higher energy prices and higher borrowing costs well, and the worst of the rise in inflation is yet to come,” he added. Sterling fell 0.15% to $1.3381 against a strengthening dollar after reaching $1.3418 on Thursday, its highest level since September 16. The greenback rose on Friday after losing ground during the week as doubts about the AI investment boom fuelled expectations of a more dovish Federal Reserve. Some economists remained cautious about the UK economic outlook. “The drop in retail sales volumes in September and slump in consumer confidence in October could be the first signs that the long-awaited squeeze on consumer spending from the Iran war is materialising,” Andrew Wishart, an economist at Berenberg, said before flagging that weaker spending highlights the downside risk from rate hikes.
EURO SINKS ON FRENCH DEBT WORRIES, YEN GAINS FOR WEEK ON AI ROUT
The euro fell on Friday and was on track for a weekly loss against both the US dollar and the yen as a selloff in French government bonds pushed the country’s debt risk premium to its highest level since the euro zone sovereign debt crisis in 2011. The Japanese yen was headed for a weekly increase against the greenback as it benefited from safe-haven flows from the selloff in AI stocks on Thursday. The dollar index was little changed on the week. The euro was hit by concerns about growing unrest in France and the country’s worsening budget problems. France will deploy 70,000 police backed by specialist units for protests on Saturday, Interior Minister Laurent Nuñez said. The country also faces the threat of a rating downgrade by Moody’s on Friday. “The pressure in the European bond market has eased today, but Moody’s review of France’s debt rating late today poses a challenge, and although the Macron government has threatened military assistance to quell the social unrest, more activity is likely this weekend,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. The euro was last down 0.21% at $1.1191 , set to end the week 0.43% lower. It fell more sharply against the yen, touching its lowest level since October 2025 at 175.08 yen . It was last down 0.11% against the Japanese currency and on track for a weekly decline of 1.1%. The dollar index , which measures the greenback against a basket of currencies including the yen and the euro, rose 0.25% to 101.82 and was headed for a weekly gain of 0.03%. The yen weakened 0.1% to 156.9 per dollar and was on track for a weekly gain of around 0.7%, its best week since mid-September. “The yen has continued to trade at stronger levels at the end of this week, encouraged by more risk-off trading conditions,” said Lee Hardman, senior currency analyst at MUFG. Traders are looking to next week’s policy meetings at the Federal Reserve, the European Central Bank and the Bank of Japan. All three are expected to leave rates unchanged, but investors will look for clues on the future path of policy. Fed funds futures traders trimmed bets on a December hike after Thursday’s stock market selloff, though they still see an 81% chance of such a move, according to LSEG data. Traders see a 66% chance of an ECB hike in December. Investors will scrutinize any hint of the rate outlook after ECB President Christine Lagarde said in late September that a moderate policy response to inflation was appropriate. Purchasing Managers’ Index data showed private-sector growth in the euro zone slowed in October to its weakest pace in four months, hurt by a renewed contraction in France. “The drop brings the PMIs back in line with other growth indicators, in our view, rather than suggesting downside risks from here,” Giada Giani, an economist at Citi, said. “France remains a drag, but the rest of the euro area remains resilient.” In Japan, data on Friday showed annual core consumer inflation exceeded the central bank’s 2% target in September for the first time in nine months. The reading points to broadening price pressures and strengthens the case for a near-term rate hike, analysts said.
POUND EDGES HIGHER, OUTPERFORMING AS INVESTOR NERVES RATTLE EURO ZONE MARKET
The pound edged up on Thursday, as outflows from euro zone assets saw UK stocks, bonds and the currency outperform other markets in the region. Expectations that the Bank of England will raise interest rates next month are also supporting the pound, following higher than expected UK inflation data this week. Sterling was up 0.1% on the day at $1.34, making it one of the stronger performers, aside from the safe-haven Japanese yen and Swiss franc. Money markets show traders expect the Bank of England to deliver at least three quarter-point rate hikes by April, with the first one priced in for the November 5 policy meeting, compared with roughly two hikes by the European Central Bank, thereby widening the interest-rate differential that fuels carry trades. These are lucrative rate-plays that involve borrowing a lower-yielding currency, in this case, the euro, to sell it and fund investment in a higher-yielding currency like the pound. Investor concern about high oil prices, the cost of the AI buildout and the ability of developed-market governments to bring down their huge debt loads rattled riskier assets, particularly in Europe, where French bond yields rose to new 24-year highs and euro zone stocks fell sharply. UK gilt yields were flat on the day , against steep rises in yields on French, Italian and Belgian debt, while the FTSE 100 (.FTSE), opens new tab fell 0.6% but outperformed the STOXX 600 (.STOXX), opens new tab, which was down 1%. Over the course of the last month, the pound has been the best-performing major currency against the US dollar, up 0.3%, while the euro is the worst-performing, with a loss of 2%. The euro is heading for a fourth straight week of declines against the pound , having lost another 0.5% so far this week, which brings its decline for the year to 1.8%. If sustained, this would be the euro’s largest monthly drop against the pound since May 2023, when it fell 2%. “It looks like there is both independent sterling strength and independent euro weakness at play in euro/sterling. Earlier this summer, we had felt that sterling gains would not last. But now greater market confidence in a Bank of England tightening cycle – we look for 25-bp hikes in February and November – makes sterling a high-carry European currency,” ING strategist Chris Turner said. The concern building over the ability of the French government to tackle its finances is also taking its toll on the euro, which traders are betting will fall further against the pound. The options market shows traders are at their most negative over the prospects of the euro against the pound since mid-2024 , according to LSEG data. UK finance minister John Healey delivers his first budget on October 28, which major investors expect to pass without rattling markets unduly.
DOLLAR DIPS AS TRADERS WAIT ON FED, AUSSIE GAINS
The US dollar index dipped on Wednesday as traders weighed renewed oil-driven inflation risks and waited for next week’s Federal Reserve meeting, while the Australian dollar gained on hawkish central bank comments. “There’s not really an overarching theme for markets… and I think it’s going to stay that way at least until next week into the FOMC,” said Shaun Osborne, chief FX strategist at Scotiabank. “We need to get a sense of what the Fed’s thinking.” The ongoing US war with Iran has increased fears that oil-driven inflation could affect Fed policy. Fed funds traders see only a small chance of a hike next week, with the next interest rate increase expected in December. Fed Chairman Kevin Warsh is also unlikely to hint at future moves. That said, “I think there will be at least some assessment from the markets about the likelihood of the timing of the rates going forward that will firm up next week,” said Osborne. Investors are also worried about how long the AI trade can last. The dollar weakened last week despite data showing US consumer price inflation accelerated in September. Optimism over the sector has supported the dollar by drawing capital into the US and lifting growth and inflation expectations. “US growth has been very much driven by the whole AI trade,” said Noah Buffam, FX strategist at CIBC Capital Markets. “That has also kept inflation above target, so it’s been much more impactful for the US than other countries.” Some worries over the stock market eased after Elon Musk said on Tuesday that a merger of his two companies SpaceX (SPCX.O), opens new tab and Tesla (TSLA.O), opens new tab would be “a good idea” and SpaceX posted its first profit as a public company. AI server maker Super Micro (SMCI.O), opens new tab, meanwhile, forecast quarterly revenue and profit margins above Wall Street estimates. The dollar index , which measures the greenback against a basket of currencies including the yen and the euro, fell 0.14% to 101.65, with the euro up 0.01% at $1.1237. The euro has been weighed down by widespread anti-government protests in France and a worsening fiscal outlook. French 10-year borrowing costs reached 24-year highs on Wednesday. “The French debt situation isn’t tractable. They do need to go in and make proper adjustments on the fiscal side to get this debt level down to at least show the seriousness around the trajectory,” said John Hardy, global head of macro strategy at Saxo in Copenhagen. French President Emmanuel Macron pledged to prevent a repeat of last weekend’s riots and looting, as the Yellow Vest movement filed plans for a major Paris march on Saturday that will present the government with its next big test. Elsewhere, the Australian dollar jumped after Reserve Bank of Australia Deputy Governor Andrew Hauser told a Citi conference that the inflation outlook looked “materially worse.” The Aussie gained 0.41% versus the greenback to $0.7031. Sterling rose 0.16% to $1.34 after data showing UK inflation rose more than expected last month, which strengthened the case for a Bank of England rate increase in November. Against the euro, the pound reached its strongest level in 17 months. The yen firmed 0.02% to 158.12 per dollar. Bank of Japan Deputy Governor Ryozo Himino said underlying inflation was close to the central bank’s 2% target and financial conditions remained loose, signalling scope for higher borrowing costs.
POUND GAINS AGAINST DOLLAR, EURO AS INFLATION DATA CEMENTS FUTURE RATE HIKE BETS
The pound rose slightly against both the euro and the dollar on Wednesday after a hotter-than-anticipated inflation reading solidified bets of a Bank of England interest rate hike next month. Sterling was last up 0.1% at $1.339, holding near its highest level in about a month. It rose 0.2% against the euro, up for the fifth straight session and at its strongest in 17 months, pinning the European common currency down at 83.80 pence. Consumer price inflation rose to 3.5% after a 3.1% increase in August, the Office for National Statistics said. Economists polled by Reuters had forecast a rise of 3.4% in the 12 months to September as the surge in energy prices caused by the Iran war gathered steam. This comes after data on Tuesday showed British workers have seen another modest rise in the pace of pay growth and there were other hints of a small recovery in the jobs market. “Strong growth, stable or falling labour market slack and surging inflation mean the MPC will hike in November. We expect another hike in February and are very close to adding a third in May, or earlier,” Pantheon Macroeconomics economists said in a note. Money market data showed traders are nearly fully pricing in a 25-basis-point rate hike in November. Expectations currently are for four rate hikes by the middle of next year, according to LSEG-compiled data. The pound has gained close to 2% against the euro this month, on pace for its best monthly showing since May 2023. It has also gained almost 1% against the dollar so far this month. The euro has suffered against most currency pairs recently, with traders remaining cautious on the single currency as France grapples with widespread anti-government protests and a worsening fiscal outlook that has pushed its 10-year borrowing costs towards 24-year highs. Focus would now be on British finance minister John Healey’s first budget, which is to be delivered next week. Earlier this month, Healey said his budget would include measures to reinforce the resilience of Britain’s economy to the Iran war energy price shock and offer “a bit of breathing space” to the country. “The key question for markets is whether the low-key budget does little to dent any credibility ahead of bigger spending, tax and borrowing decisions next year,” Deutsche Bank economists said in a note.