Shutdown Jitters, Sterling Struggles, and Tax Talk.

  • USD: A U.S. government shutdown is looming, likely pressuring the dollar until resolved.

  • GBP/USD: Dollar weakness could allow sterling to extend its rebound toward 1.35.

  • EUR/GBP: Goldman Sachs expects the euro to outperform sterling, targeting 0.90 in 12 months.

  • BoE Outlook: Rate cuts are delayed until February but likely to be more aggressive than markets currently price.

  • UK Politics: Labour may break tax pledges to plug a £30BN gap, but Reeves’ commitment to fiscal rules should calm markets.

USD:
The first U.S. government shutdown since 2018 is looming, raising the risk of dollar weakness.

“The Dollar can underperform into a U.S. Government shutdown,” notes Themistoklis Fiotakis of Barclays.

Unless Congress agrees a funding bill by Tuesday, the government will run out of cash. Republicans and Democrats remain locked in deadlock, with Vice President JP Vance blaming Democrats and President Trump warning of mass federal job cuts if no deal is reached.

Despite Republican control of both chambers, the Senate’s 60-vote threshold leaves them short of what’s needed to pass a bill.

Fiotakis adds:

“The spectre of another shutdown looms large yet again, with October 1st as the T=0 date. We’ve shown before that the dollar tends to underperform during these episodes, before rebounding once disputes are resolved.”

The dollar’s underperformance risk stems from heightened fears of slower economic activity and potential fiscal tightening to resolve the standoff.

If the pattern holds, GBP/USD could extend its recent rebound from 1.3323 to 1.3437 and test resistance at 1.35.

EUR:
Goldman Sachs analysts expect the pound to remain on the back foot against the euro over the next year, citing a mix of fiscal pressures and Bank of England rate cuts.

“The renewed focus on fiscal risks ahead of the November 26 Autumn Budget, coupled with Labour conference headlines, has weighed on gilts and sterling,” they wrote.

The government faces a £30BN hole and pressure to raise spending. While ministers may consider breaking their pledge not to hike major taxes (income tax, VAT, or national insurance), this could ease fiscal stress and reassure markets.

Still, Goldman argues sterling weakness will persist due to labour market fragility, fiscal consolidation, global growth risks, and valuation headwinds.

They now see the BoE skipping a November cut due to sticky inflation but expect four quarterly cuts from February onwards, a more dovish path than markets anticipate.

Goldman’s 12-month EUR/GBP forecast sits at 0.90, implying GBP/EUR at 1.11.

GBP:
Labour could abandon its flagship tax promises as it wrestles with a £30BN budget gap. Reports suggest hikes in VAT, income tax, or national insurance are on the table, despite the 2019 manifesto ruling them out.

Chief Secretary Darren Jones hinted flexibility, saying:

“The manifesto stands today because decisions haven’t been taken yet. I’m not ruling anything out, and I’m not ruling anything in.”

These “big lever” taxes would be politically risky but economically cleaner, avoiding the complexity of piecemeal measures.

Rachel Reeves remains committed to fiscal discipline despite pressure from colleagues and party rivals like Andy Burnham to ramp up spending. Her warning that “abandoning economic responsibility” would mean higher prices and interest rates helped reassure bond markets.

As a result, sterling is expected to weather the Labour Party conference without major shocks.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.