5 November 2026: A rate increase is certain after services activity accelerates

Prime Minister Andy Burnham is set to unveil a new trade deal with the European Union to boost economic growth, strengthen business confidence and support job creation across the UK. The agreement is expected to reduce trade barriers, improve market access for British exporters and encourage greater cooperation in sectors such as advanced manufacturing, clean energy and technology.

Ministers argue the deal will help businesses expand overseas and attract fresh investment into the UK economy. The announcement is likely to be presented as a cornerstone of Burnham's ten-year economic plan, aimed at raising productivity, increasing competitiveness and delivering long-term prosperity.

Meanwhile, a UK interest rate increase later this morning now appears all but certain after the latest services sector data showed a stronger-than-expected acceleration in activity. Because services account for most UK economic output, the improvement is likely to reinforce the Bank of England's concerns that underlying inflation pressures remain persistent. Stronger demand, resilient consumer spending and continued wage growth could make it harder for inflation to return sustainably to the Bank's 2% target.

Bank of England Governor Andrew Bailey has repeatedly stressed that the Bank will respond to economic data, and the latest figures suggest that previous actions have not slowed activity as much as anticipated. As a result, financial markets are increasingly convinced that another increase is imminent.

While tighter monetary policy will add to borrowing costs for households and businesses, the Bank is expected to prioritise controlling inflation over supporting short-term growth. Unless forthcoming data deteriorates sharply, further rate rises now look virtually guaranteed.

Many committee members’ patience with the recent rise in inflation has worn thin. The longer energy prices remain elevated, the greater the risk that a temporary price shock becomes more permanent; a ‘risk management’ hike could guard against this.

The MPC will also consider other economic indicators, including the UK’s unemployment rate, which fell to 4.7% in the three months to August, the lowest level in more than a year. Furthermore, the economy unexpectedly grew by 0.1% in August, suggesting resilience in the UK despite pressure on consumer spending and wider volatility due to the Iran war.

Stealth taxes are one of three main reasons British households are set to see near-stagnant growth in disposable income over the current decade, the government’s budget watchdog has said.

Office for Budget Responsibility Chief, Professor David Miles, said fiscal drag, whereby a freeze on income thresholds pulled more people into higher tax rates as wages grew, was squeezing household incomes.

Miles told MPs on the Treasury Committee that so-called stealth taxes, which mean the Treasury is getting billions of pounds more than it would have if thresholds moved up with inflation each year, were limiting improvements in living standards.

The OBR economist said stealth taxes were one of three main factors slowing growth in household disposable income, alongside low GDP per capita figures since the Financial Crisis and a recent rise in energy prices.

Sterling was among the strongest major currencies yesterday, rising to its highest level in about seven weeks against the US dollar as broad-based dollar weakness combined with growing expectations of a Bank of England rate hike.

The pound climbed towards 1.35 against the dollar, supported by market confidence that policymakers would tighten monetary policy and by signs that the UK economy remains resilient. Against the euro, sterling was also marginally firmer, reflecting relatively upbeat sentiment towards the UK outlook. However, analysts cautioned that much of the expected Bank of England tightening may already be priced into markets, leaving the currency vulnerable if policymakers deliver a less hawkish message than investors anticipate. Overall, sterling benefited from both domestic rate expectations and a softer US dollar environment.

Republicans are engaged in a fierce debate over the causes of their disappointing midterm election performance, with many within the party, including Vice President JD Vance, blaming Donald Trump. Critics argue that his continued dominance of the political agenda and controversial rhetoric alienated key independent and moderate voters in critical battleground areas.

However, Trump has rejected responsibility for the losses, instead pointing to candidate quality, campaign strategy and local political factors. The fallout has intensified questions about the party’s direction ahead of the next election cycle, with divisions emerging between those seeking a new approach and those remaining firmly loyal to the President.

Trump did concede that the war in Iran, which Vance opposed, was a ‘significant factor’, although he told reporters that he would do it again, since Iran mustn't be allowed to build a nuclear weapon.

The midterm debacle could have contradictory effects on Donald Trump's standing on the world stage. Rather than diminishing his influence outright, the electoral setback may intensify scrutiny of his leadership while encouraging him to adopt an even more assertive international posture.

Foreign governments will be watching closely. Allies and rivals alike often interpret election results as a measure of a leader's domestic strength. If the losses are seen as a rejection of Trump's political approach, some international partners may question his ability to command long-term support at home, even though he only has two more years to serve. That could complicate negotiations on trade, security and foreign policy initiatives in the short to medium term.

However, Trump has rarely responded to political pressure by becoming more cautious. Historically, setbacks have often been met with renewed determination and an effort to reshape the political narrative. A weakened domestic position could therefore encourage a greater emphasis on high-profile international issues, major diplomatic initiatives and a stronger focus on projecting leadership abroad.

The key question is whether Republicans view the midterms as a temporary disappointment or a broader warning sign. If Trump retains the loyalty of the party base, his influence over US foreign policy debates may remain substantial. In that scenario, the losses may not weaken him internationally. Instead, they could embolden him to double down on the policies and rhetoric that have defined his political career.

The Fed’s institutional framework, including its mandate, governance structure and operational autonomy, remains separate from electoral outcomes and is designed to insulate monetary policy from short-term political pressures.

However, the political implications of the midterms could indirectly affect perceptions of Fed independence. A weakened administration may find it harder to influence the debate over interest rates and economic policy.

For financial markets, the key issue is often not whether the Fed loses its independence, but whether political rhetoric intensifies. Investors closely monitor any signs of tension between the White House, Congress and the Central Bank, particularly when interest rate decisions remain politically sensitive.

Ultimately, the Fed’s credibility rests on its willingness to pursue its inflation and employment mandates regardless of political considerations. While the midterms may alter the political backdrop, any meaningful erosion of Federal Reserve independence would require institutional or legislative changes rather than election results alone.

The US dollar recorded a broadly weaker session across global FX markets yesterday, falling against most major currencies as investors reacted to the US midterm election results. The greenback slipped to a one-month low, with demand dampened by lower Treasury yields and a shift towards risk-sensitive assets.

The Euro, pound, yen and Swiss franc all gained against the dollar. The dollar index fell towards the 101 level, reflecting broad-based selling pressure. Despite the weakness, markets still expected further Federal Reserve tightening, suggesting traders viewed the move as a political and sentiment-driven adjustment rather than a fundamental reassessment of the US economic outlook.

European Union leaders are reportedly aiming to agree on a successor to Christine Lagarde at their December summit, a decision that will help shape the future direction of Eurozone monetary policy. The appointment comes at a critical time for the region, as policymakers balance lingering inflation risks against a fragile growth outlook and fiscal pressures in several member states.

Investors will closely monitor the selection process for clues about the ECB's future policy stance.

The decision is also likely to reflect broader political negotiations among member states, with national interests and regional representation playing an important role. As economic and political uncertainty persists across Europe, the choice of the next ECB chief will be seen as one of the most significant institutional appointments facing the European Union in the coming months.

October's inflation data could mark a pivotal moment for the ECB as policymakers assess whether further monetary tightening is needed before year-end. If price pressures remain elevated or accelerate unexpectedly, the case for a December rate increase will strengthen.

For much of this year, ECB officials have argued that inflation must return sustainably to target before policy can be relaxed. Although headline inflation has moderated from previous peaks, underlying price pressures, particularly in the services sector, continue to concern many policymakers. Strong wage growth and resilient consumer demand could reinforce fears that inflation may remain above target for longer than anticipated.

A stronger-than-expected October inflation reading has increased pressure on the ECB's more dovish members and may have shifted market expectations towards another rate rise in December. Financial markets remain highly sensitive to inflation developments, with bond yields and the currency likely to react sharply to any surprise increase in price growth.

However, the ECB also faces weak economic growth across large parts of the Eurozone, including its two largest economies. Policymakers must therefore balance inflation risks against the danger of placing excessive strain on household finances and business investment.

Nevertheless, October inflation has shown that price pressures remain stubbornly persistent; the ECB may conclude that a December rate increase is the safest option to maintain credibility and ensure inflation returns to target over the medium term.

Economic activity in Germany's private sector continued to expand in October, albeit at a softer pace than in September, with the HCOB Composite Purchasing Managers' Index (PMI) falling to 52.8 in the preliminary estimate, down from 53.8 in September. This print came in below the market expectation of 53.3.

Over the period, the HCOB Manufacturing PMI improved to 54.2 from 53.9, while the Services PMI declined to 51.7 from 52.9.

Phil Smith, Economics Associate Director at S&P Global Market Intelligence, assessing the report's findings, said: "October's flash PMI results encouragingly showed a sustained upturn in business activity across Germany, although a slowdown in growth underscored that the recovery in the Eurozone's largest economy remains fragile.”

The Euro recorded a positive session in global FX markets yesterday, driven primarily by broad-based US dollar weakness rather than Eurozone-specific developments. The single currency climbed against the dollar, reaching its strongest levels in about a month as investors reacted to the US midterm election outcome and falling Treasury yields.

The common currency rose about 0.6% against the greenback, supported by a broader shift away from the dollar across currency markets. Meanwhile, expectations that the European Central Bank may need to maintain, or even tighten, a relatively restrictive policy stance also provided underlying support.

However, the Euro's gains were largely driven by external factors, with traders mindful of ongoing economic and political challenges within the eurozone. Overall, the currency outperformed the dollar but still lacked a clear, independent catalyst.

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