13 October 2025: Sterling reacts to concerns over the budget

The economy is coming apart at the seams, public sector borrowing is through the roof, and the cost of that borrowing is at its highest in almost twenty-five years. We are spending more per annum servicing that debt than on defence and education combined.

The financial markets have lost confidence in the Government, as reflected in the currency's performance. Sterling fell to its lowest level since January last week, reaching 1.3261 versus the dollar and 1.1456 versus the euro.

This sharp decline, culminating in a 1.3% weekly fall against the US Dollar (USD) by October 10, 2025, underscores a period of heightened market instability, driven by a robust US Dollar, mounting concerns over the UK's November budget, and a persistently subdued domestic economic outlook. Investors are grappling with a complex web of financial data, central bank pronouncements, and geopolitical tensions, all of which are contributing to Sterling's precarious position and raising questions about the UK's economic trajectory.

This recent downturn has sent ripples through financial markets, prompting a re-evaluation of investment strategies and economic forecasts for the United Kingdom. The Pound's vulnerability highlights the delicate balance between global economic forces and domestic policy challenges, as the nation navigates sticky inflation, sluggish growth, and the spectre of further fiscal tightening. The immediate implications point to higher import costs, potential inflationary pressures, and a test of the Bank of England's resolve in monetary policy.

Meanwhile, the Prime Minister announced that he is considering changing pub opening hours to allow them to open longer. His thinking is unclear, but if the measure is introduced, at least people will have longer to drown their sorrows.

Stablecoins are becoming fashionable, with three G7 Central Banks each providing their take and what some are calling the end of traditional banking.

Jerome Powell and Christine Lagarde have recently made comments, while Bank of England Governor Andrew Bailey made his feelings clear on Friday.

Bailey drew a hard line in the sand last week, declaring that any stablecoin widely used for payments in the UK must be regulated exactly like money in a traditional bank, complete with depositor protections and access to central bank facilities.

Bailey’s comments aren’t just regulatory noise. They signal a fundamental shift in how Britain’s Central Bank views the intersection of crypto and traditional finance. Stablecoins would need depositor insurance, resolution schemes, and the ability to exchange for cash without relying on cryptocurrency exchanges, according to the Governor.

Employment data is due to be released on Tuesday, with the market expecting no change to the jobless rate, which is likely to remain at 4.7%.

Monthly GDP data will be published on Thursday, with the Chancellor pushing for it to be delivered only on a three-month basis, as it causes unnecessary market volatility.

GDP is expected to remain anaemic, rising by just 0.2% in August.

President Trump returned his focus to global trade as he managed to hide the disappointment of being passed over for the Nobel Peace Prize.

He has threatened to apply further tariffs on all imports from China. He has also threatened to withhold exports of Boeing parts to China in response to Chinese restrictions on the export of rare-earth minerals. Trump made the threat on Friday as part of an escalation in tensions, saying he would add a 100% tariff on imports from China from November. At a press briefing on October 10, 2025, President Trump was asked what export items the US could restrict to China.

“We have many things, including a big thing, which is aeroplanes. They have a lot of Boeing planes, and they need parts, and lots of things like that,” the US President said.

President Trump has also threatened to cancel a meeting with Chinese President Xi Jinping after China restricted exports of rare-earth minerals. On Thursday, the Department of Transportation also proposed a new rule that would prevent Chinese airlines from flying over Russia on routes between the US and China.

The influential New York Federal Reserve President John Williams has signalled he would be comfortable cutting interest rates again, voicing what appears to be a dominant view at the Fed despite some policymakers' qualms about rising inflation.

His colleague from San Francisco, Mary Daly, speaking late Thursday in California, largely echoed Williams' view, saying that, with inflation having risen less than feared due to tariffs, her focus has shifted more to the labour market.

"We're to a point now where the softening in the labour market looks like it could be more worrisome if we don't risk-manage it," Daly said. "That interest rate cut we agreed, with more projected cuts, was designed to risk-manage as we move both our inflation goal and our employment goal to a more perfect balance."

St. Louis Federal Reserve President Alberto Musalem said he sees possible room for one more interest rate cut to shore up the labour market, but urged caution because inflation remains "materially" above the U.S. central bank's 2% target.

"I am open-minded about a potential further reduction in interest rates to provide further insurance against labour market weakening," Musalem said at the Springfield Area Chamber of Commerce in Missouri.

He added, "I believe that we have to tread with caution because there's limited room for further easing before monetary policy could become overly accommodative, and I believe that policy should continue to lean against persistence in inflation."

Trading in interest-rate futures contracts reflects heavy bets that the Fed will follow its quarter-percentage-point rate cut last month with the same-sized reductions at its October 28-29 and December 9-10 meetings.

And while some Fed policymakers, including Williams, have leaned into that expectation, Musalem's comments suggest he may not be sold on the idea. Kansas City Fed President Jeff Schmid, another of the Fed's 12 voting rate-setters this year, has likewise emphasised inflation concerns.

The dollar index saw significant volatility last week but has not yet breached the 100 level. It rose to a high of 99.56 but ran into selling pressure, closing at 98.84.

France's ongoing political instability is raising concerns for Europe's future, according to the latest economic analysis. Political turbulence in France, marked by six prime ministers since 2020, reflects deeper structural challenges in balancing rising public debt, ageing populations, and the need for investment and reform.

The number of Prime Ministers isn't the cause of instability; it's a symptom. It suggests that something in the economy and/or society needs repair." The instability could push the eurozone's second-largest economy "closer to stagnation." However, direct contagion to other eurozone nations is considered unlikely. This is a factor in the current lack of coordination among Eurozone nations, which are more concerned with exports outside the region.

France's financial fragility serves as a warning for other European states. For those with deep fiscal pockets, like Germany, France's situation is a warning. It illustrates a future where fiscal stimulus isn't matched by structural reform." The European Commission and ECB are expected to pressure the French government to comply with budgetary rules, or risk rendering them obsolete.

It will be interesting to see what sanctions the EU can threaten France with, since expulsion would threaten the entire existence of the Eurozone.

Ukraine's President Volodymyr Zelenskyy said on Friday he had discussed "fair use" of frozen Russian assets with European Central Bank President Christine Lagarde.

His comments come after a significant overnight Russian air attack across Ukraine.

"We discussed how to ensure the fair use of frozen Russian assets to protect against Russia's war and to help rebuild life in Ukraine. There are solutions for how this can be done," Zelenskyy said, calling for more political will in Europe to do this.

The European Union is looking for a way to finance Ukraine's defence and reconstruction with some of the 210 billion euros worth of Russian sovereign assets immobilised in the West after Moscow invaded Ukraine in 2022. The plan proposed by Germany, however, is likely to hold strong legal and economic implications. Russia has warned of "very harsh retaliatory measures" if the EU proceeds with plans.

President Trump is happy to encourage the European Union to take advantage of the frozen assets, using the income from the frozen portfolio as security for any financing of the rebuilding of Ukrainian cities and infrastructure.

It's that time of year again.

The Eurozone has a persistent tendency to disappoint investors just as they are on the brink of trusting the economy. As interest rates have fallen and the ECB has congratulated itself for bringing inflation under control, almost entirely due to the unexpected strength of the Euro, the single currency reaches an inflexion point and begins to retreat.

Last week, the common currency fell to a low of 1.1542, although it recovered to close at 1.1617.

Have a great day!