Sterling Expected to Rise Vs Dollar, Hold Steady Vs Euro — Market Talk

Sterling falls slightly after data showed U.K. inflation eased in line with expectations in October, firming expectations for the Bank of England to cut interest rates in December. Inflation fell to 3.6% year-on-year in October from 3.8% in September. Core inflation decelerated to 3.4% from 3.5%. "Evidence inflation has peaked should tip the scales toward a December rate cut," Schroders economist George Brown says in a note. However, further cuts will depend on the contents of the Nov. 26 U.K. budget, he says. The market is now pricing in a 79% chance of a December cut, LSEG data show. Sterling last trades at $1.3140 compared with $1.3150 before the data. The euro is at 0.8817 pounds compared with 0.8811 beforehand. (renae.dyer@wsj.com)

The British pound held steady near $1.31, close to the seven-month low reached earlier this month, after fresh data showed a notable easing in UK inflation.

The slowdown offered relief for both the Bank of England and the UK government, while giving Finance Minister Rachel Reeves added momentum as she prepares to deliver a pivotal budget next week.

Headline inflation dropped to 3.6% in October, driven by lower household electricity and heating costs following changes to the Ofgem energy price cap, as well as cheaper hotel prices.

Services inflation eased more than expected, slipping to 4.5%, while core inflation moderated to 3.4%.

Reeves has pledged to reduce living costs in her upcoming 26 November tax and spending statement, aiming to steer inflation lower and smooth the path for possible Bank of England interest-rate cuts.

Meanwhile, the US dollar remains supported as investors await September’s key jobs report due on Thursday, keeping broader currency markets cautious.

Sterling could see renewed falls if U.K. inflation data on Wednesday show price pressures eased in October, ING's Chris Turner says in a note. Economists in a WSJ survey expect inflation fell to 3.6% in October from 3.8% in September. The Bank of England has said it is waiting for more evidence that inflation has peaked to cut rates further. The euro falls 0.1% to 0.8812 pounds after hitting a two-and-a-half-year high of 0.8865 Friday, LSEG data show. Against the dollar, sterling trades flat at $1.3173. Sterling fell Friday after reports the U.K. government will drop plans to raise income taxes. ING expects the euro to stay above 0.88 pounds amid uncertainty ahead of the November 26 budget. (renae.dyer@wsj.com)

The British pound weakened to around $1.315 on Friday amid heightened budget uncertainty, after reports that Chancellor Rachel Reeves is dropping plans to raise income tax.

The move follows improved forecasts from the Office for Budget Responsibility, which cut the expected fiscal shortfall from roughly £35 billion to around £20 billion.

Reeves is not expected to break Labour’s pledge on headline income-tax rates, instead likely using threshold adjustments and changes to salary-sacrifice programs to raise revenue.

She had prepared two budget options, one with major tax hikes, another with smaller measures, and is now pursuing the latter.

The budget, due on November 26, faces cabinet debate over policies including exit taxes and limited liability partnerships.

Markets pared bets on Bank of England rate cuts, with about 75% probability for a December move, but rising gilt yields continue to complicate the UK’s fiscal outlook and weigh on the pound ahead of the announcement.

The British pound weakened to around $1.31, near a seven-month low following reports that the government abandoned plans to raise income-tax rates ahead of the November 26 budget.

Prime Minister Keir Starmer and Chancellor Rachel Reeves scrapped earlier proposals to hike basic and higher tax bands, opting instead for less-direct revenue measures amid a £30?billion fiscal gap, FT reported.

The major U-turn raised concerns over fiscal discipline and political stability, prompting investors to pull back from sterling-linked assets and adding pressure on UK debt.

The currency was further weighed down by weaker-than-expected economic data, as the economy grew only modestly in Q3, while September GDP contracted month-on-month.

The disappointing figures have fueled expectations of a Bank of England rate cut next month, following earlier data showing the jobless rate at a four-year high and pay growth slowing to its weakest since early 2022.

The British pound hovered around $1.31, near its seven-month low, and touched a two-and-a-half-year low against the euro, after weaker-than-expected economic data raised expectations of a Bank of England rate cut next month and intensified pressure on Treasury chief Rachel Reeves ahead of the November 26 budget.

The UK economy grew just 0.1% quarter-on-quarter in Q3, down from 0.3% in Q2 and below forecasts of 0.2%, while September GDP contracted 0.1% month-on-month against expectations of 0.1% growth.

Data released earlier showed the jobless rate hit a four-year high, and pay growth slowed to its weakest since early 2022.

Adding to market jitters, reports of a failed attempt to challenge Prime Minister Keir Starmer’s leadership unsettled investors, with allies warning that any leadership move could trigger market instability and push gilt yields higher, just two weeks before the budget.