Sterling holds near 16-month high vs euro, budget and BoE in focus

By Stefano Rebaudo

Oct 13 (Reuters) - Sterling edged lower against the euro on Tuesday after hitting its highest in about 16 months a day earlier, supported by easing fiscal concerns and growing expectations for Bank of England rate hikes.

The pound climbed versus a weakening dollar as oil prices dropped and markets expect geopolitical tensions to remain subdued before US midterm elections.

Sterling rose 0.19% to $1.334. It was down 0.05% at 84.48 pence, after hitting on Monday 84.45 pence, the highest level since June 2025.

"Idiosyncratic risks surrounding the euro are unlikely to fade anytime soon, and the Bank of England has sent a clear enough signal that it is prepared to hike," Francesco Pesole, forex strategist at ING, said.

"We still think BoE rate expectations are too hawkish for 2027, 100 bps by July, but one or two hikes are looking increasingly likely," he added.

The International Monetary Fund's upward revision to its forecast for British economic growth this year adds to signs that rates are not very restrictive, BoE policymaker Megan Greene said on Tuesday. 

The October 28 budget is a potential downside risk for sterling, as investors have been showing little concern about the fiscal outlook, with BoE Governor Andrew Bailey recently warning governments need to redouble efforts to restore confidence in their public finances. 

Analysts recalled that Prime Minister Andy Burnham said on Monday he would press to secure a deal to improve trade relations with the European Union at a summit next month, in a move that is seen as positive for the pound's outlook.

Rabobank noted that sterling net shorts rose for a third straight week to their highest level since June, reflecting investor concerns about the UK budget.

However, euro net shorts increased even further, reaching their highest level since February 2020, with the single currency the worst-performing G10 currency so far this month.

(Reporting by Stefano Rebaudo; Editing by Jacqueline Wong)