Sterling's Friday move

The pound was one of the better-performing major currencies on Friday 30 October, drawing strength from the government's Budget and from expectations that the Bank of England will raise rates next week. Sterling was up 0.4% on the day at $1.3429, making it the best-performing major currency of the day, according to Reuters. The pound was heading for a 1% gain against the dollar in October, its first monthly gain since August.

Over the longer period, sterling has fallen 0.6% against the dollar in 2026. That compares with a fall of nearly 5% for the euro over the same period, and a fall of 0.6% for the yen, leaving the pound roughly on a par with the yen. Earlier in the week, sterling had held mostly steady a day after the Budget, last flat at $1.3325, with the euro down 0.1% at 83.62 pence.

Why markets were calm about the Budget

Chancellor John Healey delivered his first Budget as finance minister under Prime Minister Andy Burnham on Wednesday 28 October. Investors had widely expected what some termed a “do no harm budget”, and the spending plans did not move the pound or gilts strongly in either direction. Healey said the fiscal headroom — the amount of extra spending or tax cuts the government can make under its own fiscal rules — stood at £15 billion, in line with expectations from a Reuters poll but below the £23.6 billion figure from March.

Analysts described the package as a continuity Budget that left Britain's fiscal outlook largely unchanged, which markets treated as a positive. Healey announced tax increases on banks, gambling, savers and landlords, alongside tighter VAT rules for online marketplaces and measures to ease rising energy bills. Yields edged lower and gilts outperformed peers after the announcement, while sterling also strengthened, according to separate Budget analysis.

Rate expectations now in focus

With the Budget out of the way, attention has shifted to the Bank of England's policy meeting next week. Money markets show traders almost fully pricing in a rate hike next week, followed by a second in February, a third by July and a 50% chance of a fourth by December 2027. The backdrop cited in the reporting includes an economy consistently beating expectations, government bond yields on the rise, inflation at 3.1% and forecast to rise to roughly double the target, and no sign of the Middle East war ending soon.

Economists quoted in the coverage argue that the Bank's patience may have run out in the face of the energy shock. Stronger growth has led to a stabilising labour market, excess capacity may be less than previously thought, and energy prices are rising further, with consumer prices poised to top 4% year-on-year next year. The question now facing the Monetary Policy Committee, in the words of one chief UK economist, is whether the Bank Rate is sufficiently restrictive.

Sources: Reuters