Pound's Euro Surge Faces a Crucial Bank of England Test

The pound has gained on the euro as bets on higher UK interest rates run into deepening unease in European markets. Sterling touched its strongest level against the shared currency since May 2025 on October 20, trading near 83.95 pence per euro after falling to about 83.89. UK jobs data, which reinforced expectations that the Bank of England will raise rates on November 5, did most of the work.

That advance is not solely the result of brighter UK fundamentals. French political turmoil, rising European government borrowing costs and surging energy prices are also influencing currencies. With money markets nearly fully pricing a 25-basis-point BoE rise, the open question is whether sterling can keep climbing or whether those expectations have already overshot.

Rate-Hike Bets Lift Sterling While Jobs Data Offer Mixed Signals

The latest UK employment figures have made the case for tighter policy stronger, but they do not clearly show the economy can survive a prolonged period of rising rates.

Regular wages rose at an annual pace of 3.7% in the three months to August, better than the 3.6% economists had expected. Unemployment slipped to 4.7%, the lowest reading since mid-2025, and early payroll estimates pointed to possible stabilisation in employment. These results followed a stretch of UK data that came in above forecasts.

The combination is important for the BoE because persistent wage growth can add to domestic inflation, notably when labour costs remain high. If officials think inflation will remain above the 2% target for longer than they had assumed, a tighter policy stance may become necessary.

Market pricing has followed. Money-market futures had almost completely priced in a 25-basis-point rise at the November 5 meeting, which would take Bank Rate from 3.75% to 4%. Investors also anticipated additional moves into 2027, though the prospect of a sustained tightening cycle is viewed with less certainty.

Expected UK rates that are higher can help sterling by increasing the relative return on pound-denominated investments. The latest employment report, however, includes a notable counterweight.

Vacancies declined to 691,000 in the three months to September, the lowest level outside the pandemic period since 2014. The drop indicates that employers, particularly smaller firms facing higher employment costs, are still hesitating to hire. The Office for National Statistics also said payroll employment was still below its level of a year earlier.

That creates a gap between what markets are pricing and what the economy is showing. Faster wage growth and a lower unemployment rate support a November rate increase, but fewer vacancies suggest labour demand is fragile.

The data therefore argue more strongly for a possible near-term hike than for a scenario in which several further increases automatically follow. If the BoE raises rates as expected and then signals caution about what comes next, some of the pound's support from monetary policy could slip away.

European Political Upheaval Leaves the Euro More Exposed

The euro's weakness is also helping sterling, as investors take stock of the political and fiscal picture across the continent.

France has emerged as a major concern. Renewed protests and unrest have increased doubts about the government's ability to get its 2027 budget through and deal with a substantial deficit. French government bond yields have also moved close to levels last seen in 2002, and the premium over German 10-year yields has widened sharply.

The euro is affected because persistent strain in sovereign bond markets can weaken confidence in the eurozone's economic and financial stability. If investors come to demand higher risk premiums in several countries, fears of financial fragmentation could increase. That does not mean France's troubles should be read automatically as a wider eurozone crisis. The currency's outlook will turn on whether the political and fiscal pressure stays in France or reaches other markets.

The distinction is crucial for GBP/EUR. Sterling can strengthen either because investors grow more confident about the UK, less confident about the eurozone, or both.

The Oil Shock Could Complicate the Bank's Next Move

Energy prices represent another factor from the Middle East conflict that could change the path for sterling and the euro.

Brent crude climbed above $111 a barrel on October 20, its highest level since May, with disruption risks around the Strait of Hormuz persisting and little progress toward ending the conflict. Fears of further interruptions to energy shipments have kept supply and inflation concerns alive.

For the UK, higher oil and gas prices could drive inflation up through transport, household energy bills and business costs. If those pressures stay in place, the BoE may find it more difficult to bring inflation back toward 2%, which adds to the case for higher interest rates.

That could help sterling initially, especially if investors expect the BoE to tighten policy more aggressively than the European Central Bank. But the interaction among energy prices, interest rates and currencies is far from simple.

Higher energy costs also reduce the disposable income of households, press corporate margins and could dent economic growth. A sufficiently severe shock might lead markets to wonder whether further monetary tightening would harm the UK economy rather than just control inflation.

The BoE has already stated that prolonged energy-price volatility could make inflation more persistent and raise the probability of additional tightening. Its September decision kept Bank Rate at 3.75% while acknowledging the risks tied to the conflict. The ECB faces a similar choice, though the impact differs based on each economy's dependence on energy imports, inflation profile and fiscal position.

The key danger for sterling, then, is that the energy shock bolsters rate-rise expectations early on but later erodes the growth outlook. If market attention shifts toward the economic damage, the pound may surrender some of its current advantage.

Can the Pound's Euro Rally Keep Going?

The pound-euro outlook depends on whether the BoE follows through with the expected rate increase and on how officials judge the risks beyond November. Three possible paths emerge.

Sterling could keep gaining if UK inflation stays persistent, the BoE hikes and French political uncertainty continues to drag on the euro. A further expansion of expected UK-eurozone rate differentials could provide extra support, although much depends on how much tightening market prices already reflect.

The pair could instead settle into a range if November brings the hike but the BoE says later decisions will depend on incoming data. With vacancies declining and hiring demand weak, policymakers may not want to confirm expectations of a long sequence of increases. If European market strains also fade, sterling's relative advantage could shrink.

The euro could regain ground if energy prices fall, European political risks subside or traders adjust their view of how quickly UK policy will tighten. Deteriorating British growth prospects could also weigh on the pound, especially if expensive energy undermines household spending and company profitability.

For traders, it is important to distinguish the expected November decision from the rate outlook extending to 2027. A widely anticipated increase may provide only limited support once it is priced into the pound-euro rate. Future moves could depend more on BoE guidance, inflation data and developments in the Middle East.

Information is drawn from Reuters, The Wall Street Journal, the ONS, the Bank of England and Yahoo Finance.

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