The pound recovered from multi-month lows on Monday as investors increased expectations that the Bank of England could raise interest rates in response to renewed inflation pressures linked to energy prices.
Sterling rose against both the U.S. dollar and the euro, reversing part of its recent decline as markets adjusted their expectations for UK monetary policy. The move came after comments from senior BoE officials pointed to growing concerns about the impact of higher energy costs on inflation.
Markets Price a Stronger Chance of a BoE Rate Increase
According to Reuters, the pound was trading 0.1% higher against the dollar at $1.3259, after reaching a three-month low of $1.3204 the previous week. Despite the rebound, sterling remained on track for a monthly decline of more than 2% as the dollar strengthened on expectations of tighter policy from the Federal Reserve.
Against the euro, sterling gained 0.2% to 85.75 pence, recovering after touching its weakest level against the single currency since July 1.
Investors have increasingly priced in a possible shift from the BoE after a period in which the central bank avoided tightening policy while other major central banks responded to inflation risks with higher interest rates.
Energy Prices Raise Pressure on UK Policymakers
The latest market reaction followed a rise in energy prices. Oil prices climbed more than 3% on Monday, while benchmark British natural gas prices increased by a similar amount after U.S. President Donald Trump rejected an Iranian proposal linked to reopening the Strait of Hormuz and ending the conflict in the Middle East.
Higher energy costs can add pressure to inflation by increasing expenses for households and businesses. Investors have focused on whether these pressures could influence the BoE’s approach in the coming months.
BoE Governor Andrew Bailey said on Friday that sustained high energy prices would make it harder for the central bank to keep interest rates unchanged. Deputy Governor Dave Ramsden added on Monday that further upward inflation pressure could create a case for higher rates.
Roberto Cobo, head of G10 FX strategy at BBVA, said: “For sterling, a rate hike could provide near-term support, especially if accompanied by stabilisation in UK rates.”
Sterling weakens against the dollar but firms slightly against the euro ahead of Burnham speech https://t.co/2y9rI0ZMiw https://t.co/2y9rI0ZMiw pic.twitter.com/AlFDurjwRz
— Reuters UK (@ReutersUK) September 29, 2026
UK Fiscal Plans Also Influence Sterling Sentiment
Currency markets are also watching developments around the UK government’s financial plans ahead of the Autumn Budget scheduled for October 28.
Finance minister John Healey was expected to discuss measures aimed at supporting economic growth, reducing unemployment and lowering welfare spending during a speech at the Labour Party’s annual conference. He highlighted investment in sectors such as defence as part of the government’s approach to creating jobs.
Sterling also received support from movements in UK equity markets. Shares of British homebuilders rose sharply after the government confirmed that a new equity loan programme, called “Your First Home”, would be included in next month’s budget. The scheme is designed as a revival of the previous Help to Buy initiative.
ING FX analyst Francesco Pesole said the rise in homebuilder shares could be attracting larger-than-usual foreign investment flows, potentially providing additional support for the pound.
Investors Watch the Next BoE Decision
The pound’s recovery reflects a shift in market expectations rather than a completed change in UK monetary policy. Traders continue to monitor inflation data, energy costs and statements from BoE officials ahead of the November meeting.
Money market pricing currently reflects an 85% chance of a quarter percentage point interest rate increase at the BoE’s November meeting.
