GBP/EUR Hits 16-Month High as Bank of England Rate Hike Expectations Heat Up
nashnova research
Sterling rose to 84.45p per euro, a 16-month high, as markets price in Bank of England rate hikes — but the October 28 budget poses a fiscal counter-risk that could cap gains.
How much has the pound gained — and why?
Cable hit 84.45p per euro on Monday, the strongest since June 2025; it eased to 84.48p on Tuesday.
Against the dollar, sterling rose 0.19% to $1.334, helped by falling oil prices and subdued geopolitical tensions.
This means → the pound is strengthening against *both* the euro and the dollar — pointing to genuine sterling demand, not just euro weakness.
Markets are betting on BoE hikes — are they right?
ING strategist Francesco Pesole noted the BoE has sent "clear enough signals" that it is ready to raise rates, while euro-specific risks are unlikely to fade soon.
Markets currently price in 100 basis points of hikes by July 2027; Pesole calls that "too hawkish," but says one or two hikes are increasingly likely.
BoE external member Megan Greene said the IMF's upgraded UK growth forecast confirms rates are not restrictive enough — she has consistently voted for a 25bp hike to 4%, a minority on the nine-member committee.
In plain terms = the market is probably right on *direction* but may have overshot on *magnitude*.
Why is the budget the pound's biggest downside risk?
The UK's annual budget on October 28 is widely seen as a potential downside trigger for sterling.
BoE Governor Andrew Bailey recently warned that governments must do more to restore confidence in public finances.
Rabobank data show net short positions on sterling rose for a third straight week to the highest since June — a sign investors are hedging against budget disappointment.
This means → even as the pound rallies, smart money is already building defensive positions ahead of the budget.
Sterling is outperforming the euro — but for how long?
Net euro shorts have climbed even faster, reaching the highest since February 2020; the euro is the worst-performing G10 currency this month.
UK Prime Minister Andy Burnham signaled he will push for improved UK-EU trade ties at next month's summit — analysts see this as medium-term support for sterling.
This reflects the pound's core tension: rate-hike expectations push it higher while fiscal uncertainty pulls it lower — whether the budget can sustain confidence in the UK's fiscal consolidation path will determine if sterling holds its recent gains.
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