The Pound Driven by a Bank of England Ahead of the ECB

The macro point

The pound reached its highest level against the euro since spring 2025 on Friday, October 30, with EUR/GBP falling by 0.42% between October 23 and 30, to 0.83380. How to explain this strengthening of the pound, while rising energy prices are fueling inflation on both sides of the Channel? The Bank of England and the ECB do not react at the same pace to this inflation.

Across the Channel, 54 of the 63 economists surveyed by Reuters in mid-October anticipate a rise in the Bank of England's key rate from 3.75% to 4% on Thursday, November 5. UK inflation in September, at 3.5% year-on-year, exceeded expectations and supported this scenario. The British budget of October 28 also maintained the deficit reduction trajectory, without increasing government bond yields.

The UK's key rate is 1.25 points above the ECB's deposit rate, and the expected rise on Thursday would increase this gap to 1.5 points. With investments in pounds yielding more, investors are buying pounds even before the decision. This support assumes solid public finances, which the budget has not challenged. As the pound also gained against the dollar last week, the decline of EUR/GBP is not only due to the weakness of the euro.

The ECB maintained its deposit rate at 2.5% on October 29, below September's inflation of 3.8%: its real rate (rate minus inflation) is negative. Across the Channel, the key rate exceeds September's inflation, and a rise on Thursday would widen this gap. In our opinion, this advantage of real remuneration drives the underlying trend of EUR/GBP. The negative outlook assigned by Fitch on Friday to the French rating impacts mainly French debt, little on the euro.

Two risks weigh on the euro and the pound against the dollar. The first is linked to the US elections: a Democratic majority in the House, credited at 91% (Kalshi), is expected; a Republican surprise could strengthen the dollar. The second is linked to Iran: Tehran's conditional offer to reopen Hormuz was pulling Brent towards 110 dollars on Monday, but Trump does not rule out striking after the election. A surge in oil would benefit the dollar, with the US being net exporters.

Technical point

Thursday's rise being almost entirely anticipated by the rate markets, the Bank of England will mainly move the pound through its indications on its next decisions. If it hints at further increases, speculators, net sellers of 79,414 futures contracts on the pound as of October 27 (CFTC), could buy them back: the EUR/GBP would fall towards 0.8270. A rise accompanied by a pause would disappoint, bringing the pair towards 0.8370; a status quo, unlikely, would take it to 0.8420.

On the yen, bets and rates diverge. Speculators had increased their net bullish bets by 31,713 contracts in one week, to 101,591; the yen nevertheless fell. On Monday, the EUR/JPY rose towards 176.50 despite the Japanese Finance Minister's warning. In our view, these bets are fragile: the Bank of Japan has not dated its next rate hike, and a cautious speech by Governor Ueda would bring the pair to 178.50, unless intervened.

Last week, the euro fell 0.19% against the dollar, to 1.1172, and about 0.4% against the Swiss franc and Canadian dollar; on Monday, the EUR/USD was rising towards 1.1180. Net bearish bets on the euro had increased by 9,370 contracts, to 143,894. A disappointing US job report on Friday would push back the Fed's expected rate hike in December and cause euro buybacks: the EUR/USD could approach 1.1300. A strong figure could bring it back to 1.1080.

The supports and resistances displayed below indicate the low and high points within which the rates should evolve throughout the week.

Announcements to follow

Six events set the pace of the week. The verdict of the US elections will be known in the night from Tuesday to Wednesday. The flash estimate of October inflation in the euro area, on Wednesday, is expected between 3.9% (ActionForex) and 4.0% (Pantheon) year-on-year; a figure above this range would make a deposit rate rise in December more likely. Following on Thursday is the Bank of England's decision, then on Friday US employment, Canadian employment, and Governor Ueda's speech.

Below you will find the publications and events that should have a major impact on the evolution of currency rates.

The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and must not in any way be used as the basis or be considered an incentive to engage in any investment.