Sterling hits 17-month high against euro

Sterling Hits 17-Month High Against Euro as UK Outperforms Amid French Unrest

Market Movements and Economic Drivers

By Stefano Rebaudo

Sterling and Euro Performance

Oct 19 (Reuters) - Sterling hit a fresh 17-month high against the euro on Monday as street riots in France and elevated energy prices weighed on the single currency while recent strong economic data and fewer concerns about the UK fiscal trajectory propped up the British currency.

The euro fell and the spread between French OAT bonds and safe-haven German Bunds widened by a few basis points after France was rocked by some of its worst unrest in years, adding to concerns over political stability. At the same time, natural gas prices climbed to a four-year high.

The pound was up 0.25% at 84.11 pence per euro, after hitting 83.95 pence earlier in the session, the strongest since May 2025.

It dropped 0.05% against a broadly stronger dollar, to $1.3327.

Central Bank Policies and Economic Outlook

Bank of England Rate Path

Views on the Bank of England's rate path were mixed after data last week showed Britain's economy grew more strongly than expected in August.

Analyst Perspectives

Analysts at HSBC said sterling/dollar is likely to move lower as a hawkish Federal Reserve contrasts with what they called a still vulnerable UK economy and a reluctant Bank of England.

US vs UK Economic Foundations

“US rates may remain restrictive for longer, supporting the dollar, while US activity and full employment offer a firmer foundation. By contrast, UK growth momentum is fragile,” they added.

BoE Governor's Comments

BoE Governor Andrew Bailey said on Friday that soaring energy prices so far appear to be having only limited wider effects on British prices, but it is too soon to draw firm conclusions about how strong these second-round effects will be.

Commerzbank's View

According to Commerzbank, the economy's resilience could give the BoE room to raise rates without risking undue pressure on growth. 

Fiscal Policy and Investor Confidence

Confidence that the British government can deliver growth without abandoning fiscal discipline supported the pound.

Yet recent market turmoil elsewhere suggests investors should be wary of complacency, as doubts over Britain's fiscal trajectory could quickly undermine that confidence.

Upcoming Budget and Risks

According to HSBC, the October 28 budget adds further downside risks and investors may avoid long positions in sterling until fiscal measures, gilt yields and credibility are assessed.

(reporting by Stefano Rebaudo; editing by Kirsten Donovan)