Sterling hits 17-Month high vs Euro as ECB holds rates

 Sterling held steady against the dollar and crawled to its strongest level against the euro since May 2025 on Thursday, finding strong support after the UK government’s inaugural budget maintained fiscal discipline ahead of next week’s Bank of England rate decision, while the common currency struggled following the European Central Bank’s policy pause. 

The pound was flat against the dollar at $1.3321. Across European crosses, sterling touched intraday session highs against the single currency to trade up 0.22% - reaching its highest level against the euro in nearly a year and a half..

Sterling’s strength against continental peers was underpinned by Chancellor John Healey’s debut budget statement, which traders viewed as providing macro stability without stoking second-round price pressures.

The Office for Budget Responsibility (OBR) projected the UK budget deficit to narrow toward 3.4% of GDP by 2027, confirming the government retained £15 billion ($20 billion) of fiscal headroom by 2029/30.

By delivering a measured fiscal package and avoiding unfunded spending expansions, Healey effectively avoided "adding fuel to the fire" of consumer inflation, giving the Bank of England’s Monetary Policy Committee (MPC) a clear runway for its upcoming rate decision on Thursday, November 5.

Money markets broadly expect the BoE to hold Bank Rates.

In Frankfurt, the European Central Bank kept its benchmark deposit facility rate unchanged at 2.50%, as widely anticipated, following previous rate increases in June and September.

In its policy statement, the ECB noted that rising energy costs continue to present upside risks to inflation and downside risks to growth.

However, policymakers observed that underlying inflation has remained broadly stable and highlighted that financing conditions have tightened since the last meeting - an implicit reference to the surge in French government bond yields and widening sovereign spreads.

Adding to the cautious tone around the single currency, the central bank announced that President Christine Lagarde will step down in February, well ahead of her term’s scheduled conclusion in October 2027.

The broader currency backdrop remained anchored by the U.S. dollar, with the dollar index steady near 102.35 as desks digested the Federal Reserve’s split rate hold alongside robust U.S. macro prints.

The FOMC maintained the federal funds target range at 3.75% to 4.00% on Wednesday afternoon in a 10-2 vote, with two members dissenting in favor of an immediate hike.

The decision was followed on Thursday by the September U.S. Personal Consumption Expenditures (PCE) report, where core inflation rose 0.3% month-on-month and 3.1% year-on-year, landing exactly in line with expectations. Concurrently, advance third-quarter GDP expanded at an annualized 3.4%, beating the 3.2% consensus forecast.