Sterling Hits Near 17-Month High Against Euro on U.K. Rate-Rise Prospects, France Concerns — Update

By Renae Dyer

Sterling rose to its highest level in almost 17 months against the euro and a one-month high versus the dollar on Tuesday after improved U.K. employment data strengthened the case for the Bank of England to raise interest rates.

The U.K. currency was also lifted as French debt concerns weighed on the euro.

The Office for National Statistics said the U.K.'s unemployment rate fell to 4.7% in the three months to August, from 4.9% in the previous quarter. Wage growth picked up, too, with average earnings growth excluding bonuses accelerating to 3.7% over the same period from 3.6% previously.

Economists in a WSJ survey had expected the unemployment rate to remain at 4.9% and wage growth of 3.6%. Meanwhile, payrolled employees increased 13,000 in September.

"The stronger labor market data will encourage the Bank of England to begin hiking rates as soon as next month," MUFG Bank senior currency analyst Lee Hardman said in a note.

The euro fell to 0.8382 pounds, its lowest level since late May 2025, LSEG data showed. Against the dollar, sterling rose to a one-month high of $1.3409.

The market has been increasingly betting that the BOE will start raising interest rates in November due to elevated inflation fueled by higher energy prices, along with signs of economic resilience. Money markets priced a 96% chance of a 25 basis-point rate increase next month as of Tuesday, according to LSEG.

An increase in crude prices in recent days seems to have cemented expectations for rate hikes by the BOE, Thierry Wizman, Macquarie foreign exchange and rates strategist, said in a note.

BOE's relatively strong focus on energy prices favors sterling, he said.

Worries about French fiscal risks and social unrest in the country provided additional support to sterling against the euro and caused yields on French government bond yields to rise on Tuesday. The spread between 10-year French and German government bond yields rose to a two-and-a-half week high of 153 basis points, LSEG data showed.

"The market appears to see an increasing risk that the European Central Bank could be forced to maintain a more accommodative monetary policy stance for longer in order to ease pressure on long-term yields," Thu Lan Nguyen, Commerzbank head of foreign exchange and commodity research, said in a note.

France's government has been struggling to pass proposals to lower the budget deficit. The National Assembly, the lower house of France's parliament, postponed a vote on the revenue section of the 2027 draft budget bill originally scheduled for Tuesday, according to the Assembly's official TV channel.

The 2027 draft budget bill is likely to bounce between the lower and upper houses into early December, ING analyst Chris Turner said in a note. French sovereign debt also faces a Moody's rating review on Friday with the risk of it losing its AA rating.

Meanwhile, U.K. consumer price inflation data on Wednesday will be watched for further clues on when and by how much interest rates will rise. Money markets priced more than 100 basis points of rate increases over the next year, LSEG data showed.

If the inflation data show persistent price pressures on top of Tuesday's stronger employment data, the BOE will find it difficult to avoid a November hike, Patrick Munnelly, Tickmill Group partner for market strategy, said in a note.

"The key question is whether there are signs of second-round effects in services, wages or broader core prices," he said.

U.K. borrowing figures are also due Wednesday. With debt-servicing costs still rising, another drift away from the U.K.'s Office for Budget Responsibility's borrowing path would keep pressure on treasury chief John Healey ahead of the Oct. 28 budget, Munnelly said.

"The U.K. is not the worst-positioned sovereign on International Monetary Fund sustainability metrics, but it does not have much room for complacency."

Still, for now, investors are reassured by the U.K.'s stability relative to France.

"While French bonds have come under renewed pressure as investors digest the latest political unrest, the picture in the U.K. has been considerably calmer," Richard Carter, head of fixed interest research at Quilter Cheviot, said in a note.

Write to Renae Dyer at renae.dyer@wsj.com

(END) Dow Jones Newswires

October 20, 2026 11:52 ET (15:52 GMT)