UK Pound Sterling/US Dollar FX Spot Rate

Rabobank lowered its EUR/GBP forecasts across the board, with Senior FX Strategist Jane Foley now seeing the pair around 0.85 over a 3-month horizon. Foley said France's political and fiscal issues are arguably in a more difficult position currently than those of the UK, which has allowed EUR/GBP to push lower ahead of the October 28 UK budget and should cap upside potential for the currency pair. She noted that UK budget concerns are already priced into the British Pound, leaving GBP less vulnerable to a sell-off versus the Euro than it would be otherwise, and said Chancellor Healey faces a difficult task on October 28. Rabobank expects EUR/GBP to trade in a choppy range around current levels on a 1 to 3 month view, with pullbacks likely to offer the Euro some reprieve from current selling pressure, though the single currency is expected to remain on the back foot for now.

The Euro weakened against the British Pound to around 0.8475 in early European trading on Monday, pressured by French fiscal concerns following a steep bond market rout that stoked contagion fears across the Eurozone. Analysts at Brown Brothers Harriman noted that France's minority government has presented a plan to cut the budget deficit to 5.0% of GDP next year, but doubt the proposal will clear parliament without significant concessions, and warned that a rollover of the 2026 budget could push the deficit from 5.4% of GDP in 2026 to roughly 6.0% in 2027, moving France further from its European Commission commitment to bring the shortfall below 3% by 2029. Brent Donnelly, president of foreign exchange trading at Spectra Markets, said any budget promises made by the French government now are not very credible with a change of power coming soon. On the monetary policy side, Bank of England policymaker Catherine Mann said a rate hike is needed to manage inflationary risks, and markets are currently discounting roughly 30 basis points of rate hikes by the UK central bank through the end of the year, alongside approximately 90 basis points of cumulative tightening through 2027. On the daily chart, EUR/GBP remains capped below its key moving averages, with initial resistance at the Bollinger lower band around 0.8500 and further barriers at the Bollinger midline near 0.8565 and the 100-day simple moving average at 0.8580.

The Euro reversed previous daily gains against the British Pound on Friday, diving to fresh two-and-a-half-month lows just above 0.8500 and set to show a more than 1% weekly decline. The move followed hot Eurozone inflation data, which weighed on the single currency. The Euro's slide against the Pound marks a sharp turnaround from its earlier gains this week. The pair is now trading at its weakest level in roughly two and a half months.

The British Pound trades 0.1% higher at around 1.3208 against the US Dollar during the Asian trading session on Friday, with the pair forecast to likely retest its year-to-date low near 1.3140. The move comes as the US Dollar Index trades slightly lower to near 101.93, after posting a fresh over-a-year high at 102.20 on Thursday.

Bank of England Deputy Governor Ramsden said in a speech in London on the 28th that if upward pressures on the inflation outlook intensify further, it could justify raising the policy rate. He expressed the view that rising energy prices could trigger a chain of wage and price increases, and explained that he continues to closely monitor the risk that higher energy costs associated with the Iran war pose to prices. The Monetary Policy Committee decided this month, by a vote of 6 to 3, to keep the policy rate unchanged at 3.75%, but it indicated that inflation is expected to peak at around 4%, a level significantly above the Bank of England's previous forecast. Investors expect a 0.25 percentage point rate hike at the Bank of England's November meeting. Ramsden stressed that the Bank of England's current policy stance is already restrictive, and said that without the Iran war, at least two rate cuts would have been made by now and the policy rate would be at least 0.5% lower than its current level.

Morgan Stanley has formally changed its Bank of England call to two rate hikes, in November and February, pointing to fiscal policy as the key potential catalyst for further tightening beyond that. Economists led by Bruna Skarica said they see the September meeting and Deputy Governor Lombardelli's remarks as "quite balanced," with the Monetary Policy Committee keen to stress that both the November hike and the broader path ahead remain uncertain. The bank said newsflow in commodity markets "is not improving," making it harder to justify a prolonged pause as its central scenario given recent developments in the Middle East, and it noted its call still looks dovish relative to roughly 100 basis points currently priced into the front end of the U.K. yield curve. Morgan Stanley estimates current fiscal headroom at approximately £8 billion, and said a £5 billion uplift to day-to-day spending to account for higher inflation could further reduce that buffer, meaning between £10 billion and £15 billion of revenue-raising measures may be needed to lift the budget surplus toward £15 billion without additional spending cuts. The bank also updated its gilt yield forecasts to reflect the new Bank Rate path, projecting two 25-basis-point hikes in November and February, and said attention is expected to increasingly shift toward the Budget, particularly the scale and front-loading of fiscal consolidation and its implications for near-term gilt supply.

Bank of England Governor Andrew Bailey indicated that a prolonged energy shock would increase the likelihood of an interest rate hike. Speaking on the 25th at a panel discussion at an event in Oxford co-hosted by the University of Oxford and the New York Fed, Bailey said the Bank of England has held its policy rate steady since the conflict in the Middle East began, but that the longer energy prices stay elevated, "the harder it will be to maintain that stance." He also noted that policymakers cannot wait for conclusive evidence of second-round effects before moving to raise rates, adding that "by the time that evidence arrives, it will already be too late."

Morgan Stanley on the 25th revised its UK interest rate outlook, predicting that the Bank of England will raise rates by 25 basis points each in November and February next year. Previously it had expected no rate hikes for the time being. In a research note, analysts said they had formally revised their Bank of England forecast to two rate hikes per quarter, and expressed the view that fiscal policy would be the main potential catalyst for further tightening. They also noted that growth is expected to slow around the year-end and New Year period, but that near-term risks are balanced given the resilience of global growth.

Bank of England Monetary Policy Committee member Dingra said on the 24th that the long-term inflation impact on the UK from higher crude oil prices amid escalating US-Iran tensions will become evident in winter, when energy demand rises. He said medium-term inflation factors will also begin to become clearer by the end of the year, signaling caution about early rate cuts. Speaking at a meeting of the UK think tank the National Institute of Economic and Social Research, Dingra said more will be known about the course of wage negotiations and their final level as winter approaches, and noted that monetary tightening is already underway. On the other hand, he said there has not been the broad-based price surge seen in 2022, when energy prices spiked following Russia's invasion of Ukraine, and the labor market is also softening, arguing that with UK demand levels below those of the United States and the benchmark rate higher than in the euro area, the Bank of England's decision to hold rates was appropriate. Dingra supported holding rates steady at this month's Monetary Policy Committee meeting. He also suggested that the expanding use of artificial intelligence could lead to slower inflation in the services sector, and said the UK's medium-term inflation expectations are not at a concerning level. Bank of England Deputy Governor Lombardelli also said on the 24th that unless the economic slowdown becomes pronounced, rate hikes will be necessary in response to persistently high energy prices.

BofA Global Research expects the European Central Bank to raise interest rates by 0.25% in December. It said another surge in energy prices will keep euro-area inflation above the ECB's target for an extended period. This month the ECB joined other major central banks, including the US Federal Reserve and the Bank of Japan, in raising rates to contain inflation risks. In a report dated the 23rd, BofA said it remains cautious about above-forecast growth in the first half of 2026, noting that growth may continue to look resilient but will not be as strong as it is now. According to BofA, a rate hike in October is still possible, but it would likely require significantly stronger inflation readings to materialize. Financial markets broadly align with BofA's outlook, and LSEG data show traders pricing in about a 93% probability of a December rate hike. The firm also revised its outlook for the Bank of England, expecting a rate hike in November 2026 and another increase in February 2027.

The flash reading of the UK services sector purchasing managers' index compiled by S&P Global came in at 51.7 in September, down from 52.5 in August and the lowest level in three months. Economists polled by Reuters had expected 52.0. Prices charged to customers by services firms, the backbone of the UK economy, rose at their fastest pace in four months, while cost pressures intensified on higher energy prices stemming from the war in Iran. S&P Global said the survey results pointed to economic growth of about 0.1% in the third quarter, below the 0.4% recorded in the second quarter. Chief Business Economist Chris Williamson said September presented a worrying combination of disappointingly sluggish growth and strengthening inflationary pressures, adding that the rise in the prices index suggested the Bank of England may keep a hawkish stance, while weak growth in business activity highlighted the risk from higher borrowing costs. As of the 22nd, financial markets were pricing in roughly a 60% chance that the Bank of England raises interest rates on November 5, the week after Finance Minister Healey presents the budget. The manufacturing PMI rose to 52.0 from 51.7 in August, supported by an increase in domestic orders, with optimism about the outlook at a seven-month high. The composite PMI covering both manufacturing and services stood at 51.7, down from 52.5 in August.

Barclays expects the Bank of England to raise interest rates by 25 basis points in November. It cited a "dramatic change" in the medium-term energy outlook and warned that a prolonged Middle East conflict could lead to further monetary tightening. The Bank of England held its policy rate at 3.75% on the 17th, as expected, but projected that inflation would exceed 4% in early 2027, and its meeting minutes also struck a more hawkish tone. Barclays strategists also suggested that if the Middle East conflict continues, there is room for another 25 basis point hike in February 2027. JPMorgan Chase also expects the Bank of England to raise rates in November and in February 2027, revising its previous forecast of one hike in November followed by two cuts in 2027.

The GBP/JPY cross attracted fresh buyers during the Asian session on Friday and jumped to a nearly two-week top, beyond 209.50, after the Bank of Japan announced its policy decision. The Bank of Japan raised its policy rate to a 31-year high, a move that weighed on the Japanese yen and lifted the British pound against it. The pound's advance to a nearly two-week top beyond 209.50 came as the yen declined following the BoJ's rate-hike decision. The cross drew fresh buying interest through the Asian session on Friday, extending the move past the 209.50 level.

The Bank of England announced on the 17th that it will halt sales of government gilts for the next six months and completely end sales of long-dated bonds. The announcement came alongside its decision to hold the policy rate, which was left unchanged as markets expected. The central bank set out a plan to reduce the bulk of its 488 billion pounds of government bond holdings by 2034, with the decision approved by a vote of 9 to 0. Under the new plan, the Bank will cut its gilt holdings held for monetary policy purposes to zero, keeping 120 billion pounds of the 488 billion pound total, comprising bonds maturing from 2049 onward, permanently on its balance sheet as backing for banknote issuance. It will hold 222 billion pounds maturing by 2034 to maturity, while selling the remaining 146 billion pounds maturing between 2035 and 2049, equivalent to 20 billion pounds of sales a year, with average annual reductions including maturities amounting to 46 billion pounds. The Bank also said it will suspend all sales until April while it consults the government on a method of selling gilts directly to the Debt Management Office at market prices instead of conducting its own auctions. After the announcement, gilt yields fell 6 to 8 basis points.

The Bank of England decided on the 17th to hold its policy rate at 3.75%, again by a 6-3 majority. Three members of the Monetary Policy Committee backed a rise to 4%, matching the expectations of a Reuters poll of economists. The central bank projected that UK inflation would exceed 4% in early 2027, and Governor Bailey indicated that a prolonged conflict in the Middle East could make monetary tightening necessary. It also made the unexpected decision to halt all government bond sales for the next six months. The Bank raised its forecast for third-quarter economic growth to 0.4% from 0.1%, while noting that inflation, which stood at 3.1% in August, could be slightly above 4% in early 2027.

The Bank of England is expected to keep its main interest rate unchanged at 3.75% on Thursday for a sixth consecutive meeting, even as U.K. inflation climbed to a five-month high of 3.1% in August from 2.9% the month before. Economists expect a majority of the nine-member Monetary Policy Committee to hold off until there is more evidence that higher inflation is feeding into underlying prices and wages, with David Rees, head of global economics at Schroders, saying a relatively soft backdrop in wages and the labor market should limit how far imported price pressures become embedded domestically. Official figures released Wednesday showed rising pump prices and airfares were largely behind the increase, which pushed inflation further above the Bank of England's 2% target. Many economists forecast higher inflation in the coming months as households face another rise in domestic energy bills from October, and the consensus in financial markets is that rates will be raised at one of the next two meetings, in November or December. U.K. rates had been trending down from a 15-year high of 5.25% until the U.S. and Israel attacked Iran in late February, a war that drove sharp increases in oil and gas prices partly because the Strait of Hormuz has been largely closed to traffic since.

The Bank of England is likely to keep its policy rate unchanged at 3.75% at today's meeting, while sharply rising energy prices are adding pressure that it may have to follow the US Federal Reserve, which raised rates yesterday. UK natural gas futures and Brent crude prices have jumped nearly 20% this month, bad news for Britain, which relies heavily on energy imports. Most economists surveyed by Reuters last week expect the BoE to hold rates until the end of this year, with only about three of the nine members of the Monetary Policy Committee expected to vote for a hike at this meeting, while financial markets yesterday priced in an 80% chance that the BoE will raise rates by 0.25% in November, which would be the first of about four increases investors expect over the next 12 months. But only about one in eight of the respondents to the Reuters poll expect the BoE to raise rates in November.

The UK's Office for National Statistics reported on the 16th that the August consumer price index rose 3.1% year-on-year, the fastest pace in five months. It accelerated from 2.9% in July and matched the median forecast of economists compiled by Reuters. The rise reflects renewed increases in energy prices amid the rekindling of conflict in the Middle East Gulf region. Core inflation, which excludes volatile items such as food and fuel, held steady at 2.6% for a fourth consecutive month, while inflation in the services sector was also flat at 3.4%. The Bank of England had forecast in July that August inflation would come in at 2.8% year-on-year, but the central bank is expected to leave interest rates unchanged at its monetary policy committee meeting on the 17th.

UK inflation climbed for a second month to a five-month high, with consumer prices rising 3.1% in the year through August, up from 2.9% the previous month, the Office for National Statistics said Wednesday. The reading, the highest since March, matched the median forecast of economists but came in above the Bank of England's own forecast of 2.8%, and was driven by higher pump prices amid the ongoing war in Iran. Services inflation, an indicator of domestic pressures, remained at 3.4%, while core inflation, which excludes energy, food, alcohol and tobacco, was also unchanged at 2.6%. BOE officials meeting this week are expected to keep rates unchanged as a weak labor market has helped contain price pressures from the Middle East conflict so far, though that stance is becoming increasingly difficult to maintain as the war drags on. UK drivers now face the most expensive diesel and petrol costs since 2022, with oil prices above $100 a barrel, and BOE Governor Andrew Bailey warned that new risks are coming into play, particularly for food prices, amid extreme drought in the UK and the looming impact of El Niño. A Bloomberg Economics analysis found that household energy bills could jump by about 25% when the UK price cap set by regulators resets in January, which would push CPI inflation above 4% in 2027 and pile pressure on Prime Minister Andy Burnham to deliver fresh support for households at a time when the public finances are already under pressure.

Goldman Sachs said on the 14th that it now expects the Bank of England to raise interest rates by 25 basis points in November, revising its previous forecast that rates would be held steady throughout the year. In a report, analysts noted that wholesale energy prices have risen sharply in recent weeks, headline inflation has climbed by more than the central bank anticipated, and growth indicators have also been solid. Goldman expects rates to remain unchanged at 3.75% at the Monetary Policy Committee meeting on the 17th, in line with the broad market consensus. It also expects that after the November hike, rates are likely to be held steady as falling energy prices reduce the need for further tightening, with rate cuts beginning in late 2027. According to LSEG data, the market has priced in a total of 47 basis points of rate increases by the end of the year.

UBS expects the Bank of England to keep interest rates unchanged at 3.75% at its meeting on 17 September, in line with market pricing. The bank's economists forecast the Monetary Policy Committee will repeat the 6-3 vote split seen in July, with Huw Pill, Megan Greene and Catherine Mann again pushing for a quarter-point hike. UBS said the Committee's tone is likely to turn more cautious, citing the recent escalation in the Middle East and rising energy prices. Elevated energy costs sit alongside signs of stable wage and inflation expectations, a combination UBS said leaves policymakers pulled in two directions. The bank still expects the Bank of England to hold rates for the rest of 2026, followed by two cuts in 2027, though it flagged a rising risk of a pre-emptive hike if energy prices stay elevated. UBS named 5 November as a pivotal date, since that meeting follows the Autumn Budget on 28 October and will include updated economic projections. On the currency, UBS remains constructive on sterling and targets the euro at £0.8500 by year-end, supported by favourable capital flows. The bank flagged tactical weakness in the pound running into the Budget, given pressure on the public finances from higher gilt yields, with risk skewed towards £0.8650. On quantitative tightening, UBS expects the pace to slow to £50 billion between October 2026 and September 2027, down from £70 billion currently, driven by lower bond redemptions. Active gilt sales are expected to hold steady at £20 billion a year.

The euro is holding steady against the pound, hovering around 0.8580 during European hours on Wednesday, as markets fully price in a 25-basis-point rate hike by the European Central Bank to 2.5% on Thursday. Surging energy prices driven by the US-Iran conflict are fueling the expected decision, with Eurozone inflation rising above 3% in August. Meanwhile, Bank of England Governor Andrew Bailey stressed that global conflicts are driving energy prices higher, keeping UK inflation risks elevated and supporting pound resilience on dips. ING's global head of macro, Carsten Brzeski, said, "We expect the ECB to hike rates by 25 basis points. Another insurance rate hike," adding, "Or for those who don't like this term: a dovish rate hike."

Huw Pill, chief economist at the Bank of England, said on the 3rd that raising interest rates now could reduce the likelihood of having to take more aggressive measures later to curb inflation accelerated by the Iran war. In a speech prepared for the Edinburgh Chamber of Commerce, Pill noted that "a rise in the policy rate does not need to be the start of a prolonged period of aggressive consecutive hikes," and that a prompt increase in the policy rate, if effectively implemented and communicated, could help prevent inflation from persistently overshooting its target through wage and price "catch-up" dynamics. He added, "For my own part, I have concluded that the policy rate needs to be raised to 4%." Pill also expressed the view that "fine-tuning" the policy rate amid uncertainty over energy prices is problematic. Three members of the Monetary Policy Committee (MPC), including Pill, voted for a rate hike at the July meeting, while the remaining six supported holding rates steady, preferring to wait for the impact of the Middle East conflict on longer-term inflation pressures.

GBP/JPY traded in a narrow range on Thursday, with the British Pound modestly outperforming the Japanese Yen. The Yen remained on the back foot for a third consecutive day, reversing part of the intervention-driven rally that briefly sent GBP/JPY below 210.00 at the start of the week.