Pound Rises to 1.3402 Dollars as Hot UK Inflation Seals Bets on a November Rate Hike

The pound rose 0.71 percent against the dollar on Wednesday, reaching 1.3402 dollars from 1.3308 dollars. Reuters put sterling at 1.339 dollars in London trading, near its highest level in about a month. The move followed a UK inflation reading that came in hotter than economists expected and hardened bets on a Bank of England rate increase next month.

Inflation beat the forecast

The Office for National Statistics said consumer price inflation rose to 3.5 percent in the 12 months to September, up from 3.1 percent in August. Economists polled by Reuters had forecast 3.4 percent. The Bank of England had expected a smaller rise, to 3.0 percent.

Fuel and heating oil did much of the work, as energy costs climbed during the Iran war. The pressure did not stop at fuel. Core inflation, which strips out food, energy, alcohol and tobacco, rose to 2.8 percent from 2.6 percent. Services inflation rose to 3.7 percent from 3.4 percent. The Wall Street Journal noted that the Bank watches both readings for signs that higher energy costs are spreading into the rest of the economy.

Data on Tuesday also helped the pound. Reuters reported that pay growth picked up modestly and the jobs market showed small hints of recovery.

Traders price a November hike

The Bank of England held its key interest rate at 3.75 percent in September. Money markets now nearly fully price a 25 basis point increase at the next meeting on November 5, and expectations point to four rate hikes by the middle of next year, according to LSEG data reported by Reuters. Pantheon Macroeconomics told clients it expects a hike in November and another in February, and is close to adding a third in May.

The pound also gained against the euro, rising for a fifth straight session to its strongest level in 17 months, with the euro pinned at 83.80 pence. Sterling has gained close to 2 percent against the euro this month, on pace for its best monthly showing since May 2023, and almost 1 percent against the dollar.

The dollar itself held steady against most major currencies, as Middle East tensions kept safe haven demand alive. The dollar index was little changed at 101.76 after a 0.2 percent fall on Tuesday.

What happens next

Two dates now drive sterling. Finance minister John Healey delivers his first budget next week, and households hit by higher energy bills expect support. The Bank of England then meets on November 5. Traders will watch whether the Bank follows through on the priced in hike, and whether the budget steadies or rattles the fiscal outlook that sits behind the currency.