Pound retreats as French bonds stabilize after sharp decline

The British pound slipped slightly against the euro on Tuesday, retreating from a near three-month high reached in the previous session. The pound had climbed after French bonds rallied, reversing a sharp decline that had sparked concerns about public debt and an upcoming election in France. The euro fell sharply on Monday as worries spread to other markets like Italy, but French bonds rebounded on Tuesday, helping to stabilize currency markets.

The euro rose 0.1% to 84.88 pence after hitting an almost three-month low of 84.61 pence on Monday. Sterling was around 0.1% higher against the dollar, trading at $1.322. Traders are now focusing on comments from Bank of England officials this week, particularly Catherine Mann, who has advocated for higher interest rates. Mann stated that inflation has become embedded in the UK economy.

Governor Andrew Bailey and other BoE policymakers are scheduled to speak on Thursday. The central bank has so far resisted raising rates despite higher energy costs due to the Iran war, but traders anticipate an 80% chance of a rate hike in November and around 100 basis points of tightening by the end of next year. Later this month, the British budget on October 28 could also influence sterling and domestic bond markets.

Morgan Stanley issued a cautious outlook on Tuesday, suggesting that the pound may be underpricing fiscal risks ahead of the budget. The bank recommended betting on a drop in sterling to $1.285, citing challenging tax-hiking arithmetic and relatively low market expectations.