Sterling Hits Highest Level in over Week Against Dollar

The British pound surged on Thursday to its highest level in more than a week against the U.S. dollar, buoyed by growing expectations that the U.S. Federal Reserve may adopt a more dovish stance, a move that appeared to outweigh persistent concerns over the UK economy and the upcoming budget announcement in November.

Sterling rose by 0.3% to $1.3438, briefly touching $1.3443, its strongest level since October 7.

The pound’s strength came despite muted market reaction to fresh UK economic data, which showed that GDP grew by just 0.1% in August, following a 0.1% contraction in July. Analysts say the modest uptick did little to shift expectations regarding the UK’s economic outlook, but global market sentiment, particularly around U.S. interest rates, drove the momentum.

“Sterling’s rise is more about the dollar’s softness than strength in the pound itself,” said Raj Badiani, lead economist at S&P Global Market Intelligence. “Markets are increasingly pricing in a Fed pivot early next year, which is weighing on the greenback.”

Broader political sentiment in Europe also lent some support to the euro, which in turn influenced trading patterns against the pound. Hopes that French Prime Minister Sébastien Lecornu could survive a no-confidence vote helped stabilize the euro, pushing it toward its second consecutive gain against the pound this week.

The euro was last down 0.18% against sterling at 86.73 pence, retreating from stronger levels earlier in the week.

UK bond markets echoed the broader mood of caution and anticipation. Two-year gilt yields hovered around 3.88% on Thursday, down sharply from earlier in the week, when softer wage growth data hinted at waning inflationary pressures, a key indicator closely monitored by the Bank of England. Still, the prospect of a rate cut remains distant.

Alan Taylor, a member of the BoE’s Monetary Policy Committee, warned earlier this week of an "uneven and potentially harsh landing" for the UK economy, should inflation fall too rapidly.

Markets are currently pricing in only a 44% chance of a 25 basis point rate cut by the BoE in December. Most analysts expect the first full rate cut to come no earlier than February 2026, with the Bank Rate projected to fall to 3.25% by the end of next year.

Meanwhile, the U.S. dollar is on track for a third straight daily loss against the euro. While it made modest gains versus the Japanese yen, sentiment remains fragile amid ongoing U.S.-China tensions and a steady stream of dovish commentary from Fed officials.

The currency market's shifting expectations highlight the complexity of central bank strategies across major economies, as inflation eases unevenly and growth risks mount.

“Persistent growth concerns, combined with elevated wage inflation and a likely uptick in headline inflation to around 4% in September, suggest the Bank of England is unlikely to move aggressively,” Badiani added.