Pound Holds Near One-Month High Helped by Strong PMI Data

The pound traded just below $1.34, hovering near its strongest level in a month as investors assessed a mixed batch of economic data ahead of next week’s budget and the Bank of England’s November 5 policy meeting. Flash PMI data showed UK private-sector activity accelerated to its fastest pace since February, beating expectations across both manufacturing and services. However, retail sales fell more sharply than expected in September, while consumer confidence recorded its steepest monthly decline since the pandemic, reflecting persistent cost-of-living pressures and concerns over the Middle East conflict. Stronger-than-expected inflation data earlier this week prompted markets to increase bets on further monetary tightening, with at least three quarter-point rate hikes priced in by April 2027 and the first potentially coming as early as November 5. Investors now await next week’s budget, where Chancellor John Healey is expected to emphasize fiscal discipline.

The pound held at $1.34, its highest level in more than a month, as rising borrowing costs across the eurozone triggered outflows from regional assets, supporting demand for UK bonds and the currency. Sterling also drew support from stronger-than-expected UK inflation data, with annual inflation rising to 3.5% in September, its highest level since October 2025 and above forecasts of 3.4%. Core and services inflation also exceeded expectations, prompting markets to increase bets on further monetary tightening. Money markets priced in at least three quarter-point rate hikes by April 2027, with the first potentially coming as early as November 5. Meanwhile, concerns over elevated oil prices, the cost of AI infrastructure investment and mounting debt burdens in highly indebted countries such as France weighed on risk appetite. Investors also looked ahead to next week’s budget, where Chancellor John Healey is expected to emphasize fiscal discipline, potentially bolstering demand for gilts.

Sterling appreciated to $1.34, touching its highest level in a month, as stronger-than-expected UK inflation data reinforced expectations of a Bank of England rate hike next month. UK inflation climbed to 3.5% in September, its highest level since October 2025, exceeding forecasts of 3.4%, driven by motor fuels. Core and services inflation also came in above expectations. Public sector net borrowing reached £24.5 billion, higher than forecast, ahead of next week’s budget. The data follow signs of a resilient economy, including an unexpected fall in unemployment, 0.1% GDP growth in August and a narrower trade deficit. Markets are now fully pricing in a 25-basis-point increase in Bank Rate in November. The central bank has so far been the only major central bank yet to begin a policy-tightening cycle. However, Governor Andrew Bailey’s recent remarks suggesting that a prolonged war could increase pressure on policymakers to act suggest that a rate hike may be approaching.