Sterling Hits 1.20 Against the Euro as Markets Turn to the Bank of England

The final week of October was certainly a busy one for currency markets, with interest-rate decisions from both the Federal Reserve and ECB coverage" class="tcb-autolink">European Central Bank, alongside the UK Budget on Wednesday. Both central banks left rates unchanged, while the Budget passed without causing the significant disruption to Sterling or UK government bonds that some investors had feared.

As I have mentioned in recent articles, my expectation throughout October was that the uncertainty leading up to the Budget would prove more damaging for Sterling than the announcement itself. That appears to have been a reasonable assessment, with the Pound recovering strongly towards the end of the week. GBP/EUR reached the significant 1.20 level on Friday, its highest since March 2025, while GBP/USD also recovered towards 1.34. For anyone selling Sterling to purchase Euros or Dollars, these are particularly attractive levels compared with where we were only a few weeks ago.

The Budget itself was relatively cautious, which I think was probably the sensible approach given the pressure on the UK’s public finances. Chancellor John Healey announced a number of measures aimed at easing the cost of living, including support with household energy bills, changes to fuel duty and assistance for businesses. However, importantly for financial markets, the Government avoided the sort of large, unfunded spending commitments that could have caused concern in the gilt market.

One of the biggest questions ahead of Wednesday was how much fiscal headroom the Chancellor would have left. Back in March, the Office for Budget Responsibility estimated that the Government had approximately £24 billion available against its fiscal rules, but higher borrowing costs and the economic consequences of the conflict in the Middle East had put much of that buffer under pressure.

The updated forecasts confirmed that the Government now has £15 billion of headroom for 2029/30, rising to £22 billion in 2030/31. While that is clearly less than was available earlier in the year, it was broadly in line with what markets had been expecting. The Chancellor also maintained the commitment to meet the fiscal rules, with borrowing forecast to decline over the coming years.

I think that was probably the most important part of the announcement from a currency perspective. The Government hasn’t suddenly resolved the UK’s longer-term problems around productivity, economic growth or the cost of servicing its debt, but it has at least demonstrated that it understands the importance of maintaining credibility with financial markets.

The Budget also included a temporary increase in bank taxes to help fund household energy support, alongside measures aimed at encouraging business investment and supporting housing and infrastructure. Whether these policies ultimately deliver meaningful improvements in economic growth remains to be seen, but the immediate priority was avoiding a negative reaction from investors, and on that measure the Chancellor appears to have achieved what he needed to.

There were some less encouraging elements within the OBR’s forecasts, particularly the weaker outlook for economic growth and continued concerns around inflation. These are not issues that disappear simply because the Budget has been delivered. However, with the uncertainty surrounding taxation, borrowing and government spending now largely removed, I think Sterling is in a better position heading into November than it was at the beginning of October.

It is also important not to attribute the entire recovery in Sterling to the Budget. The Federal Reserve’s decision to leave rates unchanged and the subsequent movement in US Treasury yields helped GBP/USD recover, while the Euro has continued to face its own challenges. Nevertheless, the absence of a negative Budget surprise has certainly removed one of the main domestic risks that had been hanging over the Pound.

November is now looking like an important month for currency markets. December tends to become quieter as we approach Christmas, although the Federal Reserve’s final meeting of the year will still be a significant event. Before we get there, however, we have another Bank of England decision this week, alongside several important economic releases.

Monday begins with manufacturing PMI figures from the Eurozone, UK and US. European manufacturing activity is expected to soften slightly, while both the UK and US are forecast to show some improvement. These figures should give us an early indication of how businesses are performing as we enter the final two months of the year, particularly with higher energy costs and interest rates continuing to affect operating conditions.

Overnight on Tuesday, we have the Reserve Bank of Australia’s latest interest-rate decision. Markets are expecting another 25-basis-point increase, which would take the cash rate from 4.60% to 4.85%. However, after the Reserve Bank of New Zealand surprised markets by leaving rates unchanged last week, I wouldn’t completely rule out the possibility of the RBA doing something similar. If the expected increase is delivered, the accompanying statement will probably be more important for determining whether the Australian Dollar can strengthen further.

Wednesday brings services and composite PMI figures from Europe, the UK and US, alongside the latest Eurozone inflation estimate. European inflation remains a concern, particularly after the ECB chose to leave rates unchanged in October. Another increase would strengthen the argument that further tightening may eventually be required, although the ECB also has to consider the impact of higher borrowing costs on an economy that is already struggling to generate consistent growth.

Thursday is probably the most important day of the week for Sterling, with the Bank of England’s latest interest-rate decision.

Markets are currently expecting the MPC coverage" class="tcb-autolink">Monetary Policy Committee to raise Bank Rate by 25 basis points from 3.75% to 4.00%, and I think there is a reasonable case for that happening. September’s inflation figures showed CPI rising to 3.5%, considerably above the Bank’s 2% target, while energy prices continue to create concerns about further increases over the coming months.

At September’s meeting, three members of the MPC had already voted in favour of raising rates, while the remaining six preferred to hold. Since then, inflation has continued to rise and the UK economy has shown slightly more resilience than some had expected. The Bank is therefore under increasing pressure to demonstrate that it is prepared to act before inflation becomes more deeply embedded in wages and prices.

However, I don’t think Thursday’s decision is quite as straightforward as the market pricing might suggest.

The UK labour market has shown signs of weakening, and there is still a question over how much of the recent inflation is being driven by domestic demand rather than higher energy costs. Raising interest rates can help reduce spending and borrowing, but it cannot directly bring down global oil and gas prices. The risk is that the Bank raises rates to deal with inflation coming from overseas while putting additional pressure on households and businesses at home.

The Budget also gives the Bank something new to consider. Some of the measures announced by the Chancellor are designed to reduce the immediate cost-of-living pressure on households, particularly through energy support. Depending on how these measures feed through into consumer prices, they could have some influence on the Bank’s updated inflation forecasts.

This is why I think the Monetary Policy Report, the voting split and Andrew Bailey’s press conference could be more important than the actual rate decision.

If the Bank raises rates by 25 basis points, as expected, there may be an initial positive reaction in Sterling, although much of that move is likely to have been priced in already. What will matter more is whether policymakers indicate that another increase could be required in December or early 2027, or whether they believe Thursday’s move gives them enough room to wait and assess the economic data.

A more hawkish message, particularly if additional MPC members begin supporting further tightening, could provide Sterling with another boost. Conversely, if Bailey suggests that the Bank is comfortable pausing after November, we could see some of the recent strength unwind as markets reduce their expectations for future increases.

Personally, I think the Bank will be reluctant to commit to a series of further hikes at this stage. Inflation is clearly a concern, but with the labour market showing some weakness and the economic effects of the Budget still to be assessed, I suspect policymakers will want to retain some flexibility rather than give markets a clear indication of what comes next.

Friday then brings the latest US Non-Farm Payrolls report, with expectations currently pointing towards approximately 65,000 jobs being added. Last month’s employment figures were disappointing, so there is certainly room for an improvement, although NFP has been particularly unpredictable this year.

The employment data is becoming increasingly important for the Federal Reserve. Having raised rates in September and then held in October, the Fed now has to decide whether another increase is necessary before the end of the year. A stronger employment report would make that decision easier, particularly if wage growth remains elevated. Another weak report, however, could reinforce the argument that the labour market is slowing and that further tightening may do more harm than good.

For the Dollar, I think Friday’s figures could therefore have a significant influence on expectations for December’s Fed meeting. We have already seen how quickly GBP/USD and EUR/USD can respond to changes in US interest-rate expectations, and another surprise in employment could create further movement.

Overall, I am more constructive on Sterling heading into November than I was at the beginning of October. The Budget was the main domestic risk I had been watching, and although the UK’s underlying economic challenges remain, the announcement has at least removed a considerable amount of uncertainty.

GBP/EUR reaching 1.20 is particularly significant, not only because it is the highest level since March 2025, but because we have seen the pair trade much closer to 1.16 earlier this year. On a £500,000 conversion, that difference represents approximately €20,000 at the interbank rate, which demonstrates just how meaningful these movements can be for anyone purchasing property or transferring larger sums into Europe.

I wouldn’t assume Sterling continues strengthening in a straight line, particularly with the Bank of England meeting this week and the possibility of further geopolitical developments. However, with the Budget now behind us, I think the focus can return to the relative outlook for interest rates and economic growth.

If the Bank of England raises rates and leaves the possibility of further tightening open, there is a reasonable argument for Sterling to remain well supported. If it delivers a more cautious message, some profit-taking after the recent rally would not surprise me.

Either way, November has started with considerably better exchange rates for Sterling sellers than many would have expected only a few weeks ago, and Thursday’s Bank of England meeting should give us a much better idea of whether that improvement can continue.