Pound Eases Ahead of UK Budget

The British pound slipped to $1.335 in the final week of October, retreating from more than one-month highs as investors turned cautious ahead of Wednesday’s UK budget. Chancellor John Healey has pledged to give businesses more “breathing space,” raising hopes of cuts to electricity levies. According to the Financial Times, the government also plans to provide £20.4 billion in additional funding to the National Wealth Fund and British Business Bank, financed through extra borrowing. The National Wealth Fund is set to receive £15.4 billion over five years, including £2 billion for renewable energy, while the British Business Bank will receive £5 billion. However, borrowing is not expected to begin until the 2028–29 fiscal year, limiting immediate concerns for bond markets. Investors will also monitor the Bank of England’s monetary indicators later this week, alongside policy decisions from the Federal Reserve and European Central Bank.

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.