Sterling climbed to a new 16-month high against the Euro on Wednesday and held steady against the US Dollar as investors awaited US inflation figures for further signals on the outlook for interest rates.
The Pound reached its strongest level against the Euro since June 2025, with the single currency last trading at 84.34 pence. The Euro has lost around 2% against Sterling over the past three weeks, pressured by elevated oil prices and concerns over France’s public finances.
Against the Dollar, Sterling was little changed at $1.3262 at the time of writing, after earlier touching a one-week high of $1.3285.
Investors are awaiting US inflation figures, which are expected to show a sharp rise in consumer prices in September, driven by higher gasoline and food costs. As per CME’s FedWatch Tool, financial markets are pricing in a roughly 22% probability of a Federal Reserve rate hike at its 27-28 October meeting.
Attention is also turning to the UK government’s upcoming budget. Chancellor John Healey is expected to fund new measures through tax increases or spending cuts rather than additional borrowing, the Financial Times reported on Wednesday.
According to the FT, the Iran war has placed further strain on the UK’s public finances, leaving Healey with less fiscal headroom after meeting the government’s budget rules. The report added that he is expected to preserve the remaining headroom as a “contingency fund.”
The International Monetary Fund endorsed the UK’s fiscal strategy, urging the government to “stay the course” rather than pursue faster deficit reduction.
Although Britain’s debt levels are lower than those of most major advanced economies, its government borrowing costs remain the highest in the G7. Yields reached their highest levels since 1998 last week amid a global bond sell-off, before edging lower during the latest session.
Meanwhile, Bank of England Chief Economist Huw Pill, who has supported quarter-point rate increases in recent months, expressed greater scepticism about market expectations for four interest rate hikes over the coming year.
Markets are now pricing in an almost certain Bank of England interest rate hike in November, followed by three further increases by September 2027. Revised figures for UK GDP in August are due to be published on Thursday.