Sterling drops against euro and dollar ahead of UK budget

Sterling Falls vs Euro and Dollar Ahead of UK Budget, Bonds in Focus

Market Movements and Investor Sentiment

By Stefano Rebaudo

Sterling and Euro Performance

Oct 26 (Reuters) - Sterling fell against a strengthening euro on Monday after hitting a roughly 17-month high on Friday, with investors avoiding  taking big positions ahead of Wednesday's budget announcement in a week packed with central bank meetings.

The euro rebounded against the safe-haven yen and edged up against the dollar after Moody's decision to leave France's credit rating unchanged eased fears that France's fiscal troubles could trigger a broader repricing of euro zone assets.

Pound and Euro Exchange Rates

The pound dropped 0.31% to 83.98 pence against the euro after reaching 83.63 pence on Friday, the highest level since the end of May 2025. It was down 0.15% at $1.3348.

UK Budget and Bond Market Outlook

Finance Minister's Approach

British finance minister John Healey looks set to announce a cautious first budget, prioritising stability in the bond market over the kind of big spending moves that Andy Burnham talked about when he became prime minister. 

Debt Risk Premium and Market Confidence

The pound has drawn support largely from easing concerns over the UK's debt risk premium, making investors less concerned that Britain could face the kind of market pressure seen in France.

Strategist Insights

“Consensus has shifted towards a relatively supportive outcome for duration (in the government bond market), reflecting expectations of limited policy action, adherence to the fiscal rules, fiscal headroom restored to around £15bn and a reduction in long-dated gilt issuance,” said Fabio Bassanin, strategist at Morgan Stanley.

“With expectations increasingly positive, the risk of disappointment has also risen,” he added.

Gilt Yields and Historical Context

Yields on 10-year gilts fell 2.5 basis points (bps) to 5.34%. They reached 5.5267% on October 8, the highest level since July 2007.

Factors Supporting Sterling

Economic Data and Central Bank Policy

Strategists said other developments had also improved sterling's outlook, citing resilient economic data that allowed the Bank of England to maintain a relatively hawkish stance, widening French bond spreads that supported the pound against the euro, and signs of a thaw in UK-European Union relations that could chip away at sterling's lingering Brexit risk premium.

Upcoming Central Bank Meetings

Investors will closely watch the outcome of central bank meetings later this week, with policy decisions due from the Federal Reserve, European Central Bank, Bank of Japan, Reserve Bank of New Zealand and Bank of Canada.

(reporting by Stefano Rebaudo; editing by Keith Weir)