Sterling edged higher on Thursday as outflows from euro zone assets lifted UK markets relative to the region. Bets on a Bank of England rate increase next month support the pound, while the euro heads for a fourth straight weekly loss against it.
Sterling rose 0.1% on the day to $1.34 as outflows from euro zone assets saw UK stocks, bonds and the currency outperform other markets in the region. The pound was one of the stronger performers, aside from the safe-haven Japanese yen and Swiss franc.
Expectations that the Bank of England will raise interest rates next month also back the pound, following higher than expected UK inflation data this week.
Rate hike bets widen the gap with the euro
Money markets show traders expect at least three quarter-point rate hikes from the Bank of England by April, with the first priced in for the November 5 meeting. Traders expect roughly two hikes from the European Central Bank over the same period.
That widens the interest-rate differential that fuels carry trades, in which investors borrow a lower-yielding currency such as the euro to fund investment in a higher-yielding one like the pound.
Euro slides against the pound
Over the past month, the pound has been the best-performing major currency against the US dollar, up 0.3%, while the euro has been the worst, losing 2%. The euro has also lost another 0.5% against the pound this week, taking its decline for the year to 1.8%.
Concern over the French government's ability to tackle its finances is also weighing on the euro. Options traders are the most negative on the euro against the pound since mid-2024, according to LSEG data.
ING strategist Chris Turner said it looks like there is both "independent sterling strength and independent euro weakness" at play in euro/sterling.
A softer dollar adds to the move
A separate Investing.com report said sterling was up 0.10% at $1.3406 as a pullback in US technology stocks and declining Treasury yields prompted investors to trim long dollar positions. That report described the gain as primarily a reflection of broader dollar softness rather than UK-specific fundamentals.
Attention in the UK now turns to finance minister John Healey's first budget on October 28, which major investors expect to pass without rattling markets unduly.
Sources: Investing.com (Reuters), Investing.com
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