Sterling continues to be one of the most resilient major currencies this month, as strong UK data and rising Bank of England rate hike expectations underpin the Pound.

Yesterday’s UK job figures came in better than expected with the unemployment rate unexpectedly falling in the three months to August (4.7% vs previous/expected 4.9%) and wage growth ticked higher. Additionally, news that Chancellor Healey has ruled out hikes to capital gains tax at next week’s Autumn Budget has been particularly welcomed by markets. Meanwhile, this morning's UK inflation data has supported the rally in the Pound. Data showed that UK headline inflation (CPI) rose to 3.5% in September (up from 3.1% in August), which is its highest level since October last year. As expected, higher energy costs were the main culprit for the rise, with fuel the largest contributor. 

More importantly, the data showed that core inflation, which strips out volatile items such as energy and food, also moved higher to 2.8% (from 2.6%). That's the part the BoE will be most focused on and it hints that price pressures might be broadening, which will likely keep the MPC committed to keeping a lid on spiralling prices. Markets had already been pricing in around a 96% chance of a 0.25% BoE interest rate hike in November and are now pricing in well over 100 basis points (1%) of hikes over the next 12 months, which has created a lot of fresh demand for GBP. Some analysts, however, are arguing that markets are getting too carried away with these expectations as conditions remain fragile in the UK and there’s not yet enough evidence to convincingly conclude that higher energy costs are feeding through into wider inflation.

Political uncertainty and the widening civil unrest in France have continued to weigh on the Euro. Yesterday, the 10-year French government bond yield tested 5% again. It remains unclear whether next year’s French budget will even clear parliament and, even if it does, it's likely to be so watered down that it does little to fix its deficit problem. Furthermore, European gas prices have also jumped above €90/MWh for the first time since late 2022, which is adding further pressure on the Eurozone economy. As things stand, selling Euros appears to be the path of least resistance for many traders.

As a result, the GBP/EUR has risen around 2% this month and trades at fresh 17-month highs this morning. The GBP/USD is up 2.5 cents from last week’s low and trades towards the higher end of where it’s been over the past 5-weeks. The EUR/USD remains towards the lower end of its recent range.

Looking ahead, next week's Budget is the next big test for Sterling. With the Pound now looking quite stretched after its recent run, any announcement that damages growth without a credible plan for getting the public finances under control could trigger a sharp reversal.

London

Sterling hits 17-month high against the Euro as BoE rate hike bets build

The Euro has come under heavy selling pressure today as concerns grow over France's deteriorating public finances and political outlook.

Investors are demanding significantly higher returns when buying French government bonds with France's 10-year government bond yields pushing close to 5%, which is its highest level since 2002. Worryingly, the gap between French and German yields has widened sharply to levels not seen since the Eurozone debt crisis of 2011-12, which is a sign that confidence in French fiscal credibility is eroding fast. A series of budget measures designed to reduce the deficit have been met with scepticism by markets and any promises made by the current government lack credibility ahead of next April's French presidential elections.

The two leading candidates in the presidential race (far-right Marine Le Pen and far-left Jean-Luc Mélenchon) are not helping the situation as both are seen as unlikely to deliver the kind of fiscal discipline markets want. Le Pen has pledged tax cuts and a reduction in the retirement age, despite an already generous pension system, and neither candidate is seen as willing to make the painful spending cuts needed to put France's finances on a sustainable path. The risk of a re-run of the Eurozone debt crisis, albeit in a different form, is increasingly being discussed in market circles, which is casting a shadow over the Euro. 

Adding to the Euro's woes, the USD and Sterling have both firmed against it this morning. Despite Friday's disappointing US jobs report, the Dollar has continued to attract safe-haven demand amid the ongoing geopolitical uncertainty in the Middle East. Meanwhile, BoE policymaker Catherine Mann has indicated that a further UK rate hike is needed to manage inflation risks which has increased market expectations for further UK rate hikes next year and demand for the Pound more . 

As a result, the GBP/EUR is up nearly 2-cents from this time last week and trades towards the highest levels since June 2025. The EUR/USD has continued its run lower and currently trades around the lowest level since May 2025. The GBP/USD is broadly steady and remains close to the lower end of where it has traded throughout this year, as the dollar strength and sterling resilience generally cancel each other out.

French parliament

Euro tumbles as France's debt crisis deepens

The USD has strengthened overnight after the Federal Reserve delivered its first interest rate hike in three years.

As expected, they raised rates by 0.25% to a new target range of 3.75%–4.00% and indicated there might be another hike needed before the end of the year. Markets had been expecting them to forecast another couple of hikes for next year, but their projections showed no changes for 2027 and instead pointed towards rate cuts beginning in 2028. In that sense, the Fed meeting was less hawkish than many had anticipated. However, what seems to have caught traders’ eyes was the vote split, updates to their inflation projections and changes in the accompanying statement. 

The consensus was that one or two members would vote to keep rates on hold, but we got a unanimous decision (12-0). Furthermore, in the statement they removed language blaming elevated inflation on temporary factors and replaced it with a firm commitment to deliver price stability, which suggests concern is growing over how entrenched US inflation is becoming and that their priority is to control it. They also upgraded the description of the economy to "expanding at a solid pace” and raised their inflation forecasts with their projections indicating that they’re not expecting inflation to return to their 2% target until 2029, which both further suggest higher interest rates for longer.

Looking ahead, the key drivers to watch for the USD are oil prices and the US economic data. With crude oil prices back above $100/barrel, interest rates going up, and bond yields sky high, further pressure is mounting on Trump to end the war with Iran. Any signs of de-escalation would quickly reduce oil prices which could quickly shift rate expectations. Equally, if US employment and inflation data begin to weaken, then the Fed’s case for further hike rates will likely weaken in order to prevent damaging economic growth. Of course, the opposite is true if things escalate further.

As a result, the GBP/USD fell over 1-cent from yesterday’s high and it trades around a 7-week low. The EUR/USD fell close to a cent from yesterday’s high and also towards a 7-week low (lowest since end of July). The GBP/EUR remains within its familiar range. 

Attention will now shift towards this afternoon’s Bank of England interest rate decision (12pm). They’re widely anticipated to keep rates on hold at 3.75% and therefore the focus will be on how the vote was split, the meeting minutes and any forward guidance on inflation.

Fed reserve

Fed hikes for the first time since 2023

August lived up to its reputation as one of the quieter months for FX markets, but sterling took things to another level with GBP volatility hitting a multi-year low. September looks likely to shake things up and bring FX markets back to life though. 

The dominant story across global markets remains the broad sell-off in government bonds, which has sent yields to multi-year highs as investors worry over rising deficits, AI-related borrowing, and the ongoing Iran conflict which has pushed oil back above $90 a barrel again. 

The USD has recovered some ground over the past week following hawkish remarks from Fed Chair Warsh at the Jackson Hole symposium. While acknowledging that recent US inflation data had been better than expected, Warsh was clear that the Fed still had "work to do" if it wasn't confident inflation was heading back to target fast enough. This led to some sharp repricing of market rate hike expectations with odds of a Fed September rate hike going from fairly unlikely to essentially the base case scenario (circa two-thirds). Whether the data backs that up between now and the meeting will be the key question for the USD in the weeks ahead.

From a Sterling perspective, there was little in the way of market-moving data but, from the figures we did receive, it continued to signal that the UK economy is holding up better than many expected, even as the jobs market softens and borrowing costs rise. The bigger concern is the ongoing gilt sell-off, with 10-year yields surging to an 18-year high above 5.2%. That rise directly erodes the government's fiscal headroom and raises the prospect of tax hikes at the Autumn Budget, even before accounting for any additional spending Andy Burnham may want to pursue. Although his government has committed to sticking to the fiscal rules, the market will be watching closely to see whether surging gilt yields make that promise increasingly difficult to keep.

The Euro had a brief surge higher during the second half of August following a surprise expansion of US Treasury buyback operations. A September ECB rate hike now seems almost guaranteed after Eurozone inflation jumped to 3.3% in August. However, with core inflation still stuck at 2.4%, which is barely above target and exactly where it was when the Iran war began, markets may be getting ahead of themselves in pricing in further hikes beyond September, which could therefore limit how much further the euro can rally.

As a result, the GBP/USD has lost around 1.1% in the last week and currently trades close to a 3-week low. The GBP/EUR has been trading within a very tight range over the past month and currently sits towards the lower end of this range and close to the lower end of where its travelled since the start of July. The EUR/USD currently trades around a 2-week low having edged around 1% lower from last week’s high. 

August's FX calm gives way to a potentially livelier September

Sterling has rallied in the past 24hrs following a reduction in UK political risk and as markets increase their BoE interest rate expectations.

Reports that Shabana Mahmood is set to become the next Chancellor of the Exchequer under incoming PM Andy Burnham have been welcomed by markets. She is viewed as a fiscally disciplined and business-friendly Labour politician who is expected to prioritise having a stable economic policy and maintaining investor confidence. Markets had been bracing for a more fiscally expansionary alternative in Ed Miliband, so there’s been quite a relief rally in Sterling and UK government bonds following this news. Furthermore, the Guardian has also reported that Andy Burnham is playing down the prospect of a wealth tax for now.

This morning’s UK GDP figures came in as expected at 0.1%, which was a return to positive territory after a 0.1% contraction the previous month. With UK inflation continuing to run high, and impacts of the Iran war continuing to take hold, markets are now fully pricing in a BoE interest rate hike by the November policy meeting and a second hike pencilled in by April 2027. This shift in expectations has made the Pound more attractive to investors seeking higher yields. 

In other news, the USD has been on the back foot after Tuesday’s US inflation data missed expectations. Headline inflation (CPI)
fell to 3.5% year-on-year, which is down sharply from 4.2% in May and well below the 3.8% forecast. On a monthly basis, prices fell 0.4% versus an expected 0.1% drop, which was the largest single-month drop since April 2020. This is mainly being put down to the fall in oil prices in June following the announcement of the Iran ceasefire. This data, coupled with the recent weak US job figures, has dramatically pushed back the Federal Reserve rate hike expectations and thereby reduced the appeal of the USD.

As a result, the GBP/USD has climbed around 2-cents from Tuesday’s low and touched a 2-mth high earlier. The GBP/EUR jumped nearly 1% higher yesterday and to a 13-mth high. The EUR/USD has risen nearly a cent since Tuesday’s US inflation data and trades towards the higher end of the past month.

With Westminster heading into summer recess, political scrutiny of the new government will ease temporarily. However, the conversation will inevitably turn to the Autumn Budget and what tax and spending decisions Burnham's team will make. That is likely to be the next real test for the pound. For now, though, the tailwinds are firmly in place.

Sterling

Sterling rallies on Mahmood Chancellor reports

The USD has strengthened overnight following last night’s Federal Reserve interest rate meeting which is the first under new Fed Chair Kevin Warsh.

As expected, the US central bank voted to keep interest rates on hold at 3.50%-3.75%. However, there was a notable hawkish shift in their overall tone which caught markets off guard. They removed previous language pointing to a bias in cutting rates and instead the future projections pointed towards a likely rate hike before the end of the year. The change was driven largely by a sharp upward revision to inflation forecasts, with officials now expecting headline inflation of 3.6% in 2026, up from 2.7% previously.

Consequently, money markets are now pricing the odds of a September US rate hike at over 50% (vs 30% on Tues) and the odds have shot up to over 80% for a hike by the end of December. This repricing in US interest rate expectations has boosted demand for the USD leading to a rally in the currency.

In other news, oil prices have eased after the US and Iran signed a deal to end the war. Markets will be closely examining when the Strait of Hormuz will be fully reopened for free passage. Once this is confirmed, then this might lead to a bit of increased flow away from safe-haven currencies and into more perceived riskier assets. 

As a result, GBP/USD has fallen around 1.2% from yesterday’s high and now trades at a 10-week low. The EUR/USD is down around 1.1% from yesterday’s high and at the lowest levels since the end of March. The GBP/EUR remains in familiar ranges but has lost around half a cent which takes it to the lower end of where it has traded this month. 

Attention now turns to the Bank of England, which announces its own rate decision later today. While they’re also expected to keep rates on hold (3.75%), traders will be closely monitoring their voting patterns and thoughts on the ongoing impact of the Iran war and how this new truce will impact on inflation moving forward. If the BoE tone remains fairly steady in its tone, then the contrast between a hawkish Fed and a steady BoE could keep pressure on sterling into the afternoon. Watch this space.

Dollar rallies as Fed turns hawkish under new Chair Warsh

Sterling has come under pressure this morning amid growing political uncertainty around Keir Starmer's future as Prime Minister. 

Last week’s heavy Labour losses in the local elections have triggered a wave of public dissent within the party, with more than 75 MPs now calling for his resignation. At a cabinet meeting this morning, Starmer acknowledged the scale of the defeat and accepted personal responsibility but made clear he intends to "get on with governing" despite what he described as a "destabilising" 48 hours. No formal leadership challenge has been triggered so far, but markets are watching developments closely.

Investors are concerned that if ​Starmer is forced out that he would ​be ⁠replaced by a more left-leaning Labour leader who might push for more spending (by raising public borrowing and taxes further) at a time when Britain's finances ​are already stretched. UK borrowing costs are already the highest in the G7 ​and have risen the most since the Iran war, so a further increase will add even more pressure onto our public finances. These fears are being played out this morning in the markets with long-dated gilt yields surging to their highest levels in nearly 30 years, UK banking stocks down (over fears of potential banking surcharge rises) and Sterling losses.

As a result, GBP/USD has fallen around 1% from yesterday's high and currently trades around a 12-day low. GBP/EUR has dropped close to a cent from yesterday's peak and sits around a 2.5-week low. 

The direction from here will hinge on how quickly the political situation resolves and/or whether things will escalate. Any signs of stabilisation could see the Pound recover some of its losses, but a prolonged period of uncertainty and/or a potential leadership change, could see further losses. 

DOwning street

Sterling slides as Starmer fights for survival

After a tense start to the week, Sterling is ending it in a stronger position. 

Reports of potential new US military operations in Iran led to oil spiking to the highest levels since the start of the conflict earlier this week (Brent crude hit above $125/barrel). It’s since receded but remains at elevated levels as the Strait of Hormuz continues to be blocked and with no resolution in sight. Attention then turned to a busy week of central bank interest rate decisions.

As expected, the Federal Reserve, ECB, and Bank of England all voted to keep rates on hold and the tone across all three reflected a shared concern about the inflationary implications of prolonged high energy prices. The Fed vote was the most divided it has been since 1992 (8-4 vote split) and with incoming Chair Kevin Warsh expected to push towards lower interest rates, many analysts believe the next move in US rates is down rather than up. Conversely, yesterday’s BoE and ECB meetings indicated they looked more inclined to raise rates than cut them.

The ECB held unanimously, but President Lagarde's press conference disappointed those expecting a firmer signal on future rate hikes. Although she acknowledged that a rate rise had been discussed, her overall tone was more cautious than markets had anticipated. They noted that the Euro area came into this period with inflation near target and a relatively resilient economy which they believe gives them a buffer to absorb some of the heavier shocks of this energy crisis and the power to not make any rash policy decisions. A June hike remains close to fully priced in, though expectations for the total number of hikes this year have begun to ease, which led to some weakening in the Euro (particularly against GBP).

The Bank of England voted 8-1 to hold, with chief economist Huw Pill the only one calling for an immediate hike. Policymakers seem alert to the risk of inflation running hot but also aware that the oil shock is likely temporary and that a softer labour market should keep a lid on wages. However, the Governor also made it explicitly clear that they were prepared to act pre-emptively if energy-driven price pressures did begin to feed into wages (to avoid a wage-price spiral). This was taken by markets as being more hawkish than the other central banks' tones and therefore made Sterling more attractive to investors seeking higher yields. 

As a result, the GBP/USD rate has rallied by around 1.2% from yesterday morning and now trades at a 10-week high. The GBP/EUR pushed up by over half a cent yesterday and trades towards the higher end of where it's traded since the end of August. With central banks in wait-and-see mode and war risk continuing in the background, the direction of travel for rates will continue to be shaped by incoming data and any meaningful developments in the Iran peace process.

Bank of England

Oil spikes, central banks hold, and Sterling climbs

Markets have rallied sharply following the announcement of a two-week ceasefire between the US and Iran whilst they negotiate a lasting peace deal. 

Given the de-escalation, the relief across global markets has been immediate and dramatic. Oil prices have tumbled and equity markets have surged on expectations of a resumption of oil and gas flows through the Strait of Hormuz. The drop in oil prices is being described as the biggest one-day fall since the 1991 Gulf War with Brent Crude falling by around 16%. The USD has also been heavily sold as the safe-haven demand that has underpinned it throughout the conflict quickly evaporated and as traders recommenced pricing in Federal Reserve interest rate cuts for later this year. 

Peace talks are due to begin on Friday in Pakistan and may be extended if both parties agree, which gives some hope that this is more than just another pause. That said, it’s important to not get too getting carried away as there's still a risk that the war could restart any time, as they’ve not officially ended the hostilities. Furthermore, some of the proposed demands from both sides could prove too difficult to overcome in the talks. 

As a result, the GBP/USD has moved 2-cents higher from yesterday evening and trades closer to the higher end of where it’s traded since the onset of the war. The EUR/USD rallied over 1.5% and trades around a 5-week high. The GBP/EUR has moved to an 8-day high after gaining half a cent from yesterday's low. 

Markets will be closely watching how the peace talks develop over the next two weeks. If genuine progress is being made and the Strait fully reopens, then there’s a chance we might see further USD weakness and a continued recovery in risk currencies. However, if talks stall or fighting resumes, the moves seen over the past six weeks could quickly return.

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