Sterling rises to fresh 16-month high against euro

Oct 14 (Reuters) - The British pound touched a fresh 16-month high against the euro on Wednesday, and steadied against the dollar as traders awaited US inflation data for clues about the interest rate path. 

Sterling rose to its strongest level since June 2025 versus the euro, which was last trading at 84.34 pence. The euro has fallen around 2% against the pound in the last three weeks alone, as elevated oil prices and concerns about France's public finances weigh on the single currency.

Against the dollar, sterling was nearly flat at $1.3262 by 1109 GMT, having touched a one-week high of $1.3285 earlier in the session.

Investors are awaiting the release of US inflation data, which is expected to show consumer prices surged in September, driven by rising gasoline and food costs. Financial markets assign a roughly 22% chance of a rate hike at the Federal Reserve's October 27-28 policy meeting, CME's FedWatch Tool showed.  

Traders were also watching developments around the UK government's upcoming budget announcement. UK finance minister John Healey is expected to pay for new initiatives in this month’s budget with higher taxes or spending cuts rather than more borrowing, the Financial Times reported on Wednesday.

The Iran war has put additional pressure on Britain's public finances and left Healey with less headroom after meeting fiscal rules, according to the FT report, which also said the finance minister is expected to let the headroom act as a "contingency fund." 

"We continue to think the market is under-pricing fiscal risk ahead of the Budget on October 28th, with 10-year gilts above 5.4% and headroom thin, so we retain our bearish bias into month-end," analysts at Monex Europe said in a note. 

"For today, cable will follow the dollar’s reaction to CPI; an in-line print supports a push towards 1.33, but we would look to fade sterling strength."

The IMF backed Britain's fiscal strategy, urging it to "stay the course" rather than accelerate deficit reduction. Despite lower debt levels than most of the largest advanced economies, British government borrowing costs are the highest in the Group of Seven and last week touched their highest since 1998 as part of a global bond selloff. British government bond yields slipped on the day.

Meanwhile, Bank of England Chief Economist Huw Pill, who has voted for a quarter-point interest rate hike in recent months, said he was more sceptical about market pricing of four increases to borrowing costs by the BoE over the next year.

Investors are pricing in a near-certain chance of a BoE rate hike at its November meeting followed by three more increases by September 2027. Revisions to the UK's August GDP data will be released on Thursday.

(Reporting by Sruthi Shankar in Bengaluru; Editing by Toby Chopra)