Sterling Rises Ahead of BoE Rate Decision

The pound rose above $1.34, reaching its highest level since mid-September, as investors positioned for the Bank of England’s expected return to monetary tightening later this week. Meanwhile, renewed declines in oil prices and uncertainty surrounding Tuesday’s US midterm elections weighed on the US dollar. The Bank of England is widely expected to deliver its first interest rate hike since 2023 on Thursday, amid mounting inflationary pressures linked to the Iran war and signs of resilience in the UK economy. However, policymakers are also expected to push back against market expectations of several additional rate increases next year. Meanwhile, Chancellor John Healey’s first budget largely met market expectations, offering few surprises. Elsewhere, oil prices declined as reports suggested US President Donald Trump was willing to give diplomacy with Iran more time before considering further military action after Tuesday’s midterm elections.

The pound climbed above $1.34, reaching its highest level since mid-September and gaining around 1% this month. This marks its first monthly advance since August, supported by the government’s budget and growing expectations of a Bank of England rate hike in November. Chancellor John Healey delivered his first budget on Wednesday, with spending plans largely meeting expectations and offering few surprises for markets. He said the government would use part of its fiscal headroom, now reduced to £15 billion from £24 billion, to meet its main fiscal target while continuing efforts to restore public finances amid the economic fallout from the Iran conflict. Money markets are almost fully pricing in a BoE rate hike on November 5, followed by further increases in February and July, with a 50% chance of another by December 2027, as persistent inflation above target, rising bond yields and stronger-than-expected economic data have reinforced expectations of tighter policy.

The British pound remained above $1.33 a day after Finance Minister John Healey unveiled a cautious budget featuring tax and spending measures designed to support households facing what he described as “global economic storms.” Healey reaffirmed the government’s commitment to its fiscal rules, announcing tax increases on banks, gambling, savings, and landlords, alongside tighter VAT rules for online marketplaces and measures to cushion households from rising energy bills. He also said the government would use part of its fiscal buffer, now reduced to £15 billion from a previous estimate of £24 billion, to meet its main fiscal target while maintaining efforts to repair public finances despite the economic fallout from the Iran conflict. The budget did little to shift market expectations for the Bank of England’s policy meeting next week. Money markets are fully pricing in a rate hike on November 5, with a second increase also expected by February.