Pound stands tall as dollar, euro wilt

Pound Outperforms Dollar and Euro Amid UK Budget and BoE Rate Speculation

UK Economic Developments and Sterling Performance

By Amanda Cooper

Government Budget and Market Reaction

LONDON, Oct 30 (Reuters) - The pound was one of the better performing currencies on Friday, drawing strength from the government's budget and supported by expectations for the Bank of England to raise rates next week. 

Labour Government’s Fiscal Plans

John Healey delivered his first budget as finance minister under Labour Prime Minister Andy Burnham on Wednesday. Investors had widely expected what some had termed a "do no harm budget" and Healey's spending plans did not provide any surprises to move the pound or gilts strongly in either direction, or materially change the outlook for interest rates.

Fiscal Headroom and Market Expectations

He said the headroom — the amount of extra spending or tax cuts the government can make under its own fiscal rules — stood at £15 billion ($19.93 billion), in line with expectations from a Reuters poll, but below the £23.6 billion in March.

Sterling’s Performance Against Major Currencies

With that risk event out of the way, and expectations set for a rate rise from the BoE next week, sterling was up 0.4% on Friday at $1.3429, making it the best-performing major currency of the day. 

The pound is heading for a 1% gain against the dollar this month, its first monthly gain since August. It has fallen 0.6% against the dollar in 2026, handily outperforming the euro, which has fallen nearly 5%, and on a par with the yen, which is also down 0.6% against the US currency.

Comparative Analysis: Pound vs. Euro

Its performance against the euro this year is even starker. The euro has lost over 4% against sterling, although this is more driven by broad-based negativity towards the single European currency than by outright optimism over the pound, as evidenced by the vast position investors have built up that bet against the euro itself.   

Bank of England Rate Hike Expectations

Money markets show traders are almost fully pricing in a hike from the BoE next week, followed by a second in February, a third by July and a 50% chance of a fourth by December 2027.

Economic Indicators and Inflation Outlook

With the British 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 war in the Middle East ending any time soon, most economists believe it is now time to increase borrowing costs.

Expert Commentary

"We expect the Bank of England’s patience to have run out with the unfolding energy shock. Stronger growth has led to a stabilising labour market. Excess capacity may be less than previously thought. And with energy prices rising further, and CPI poised to top 4% year-on-year next year, one question remains for the MPC: is the Bank Rate sufficiently restrictive?" Sanjay Raja, chief UK economist at Deutsche Bank, said in a note.

(Reporting by Amanda Cooper; Editing by Kirsten Donovan)