Pound Weakens as French Bonds Recover and UK Budget Looms

The British pound weakened from a near three-month high against the euro as French government bonds stabilized, shifting market focus to key Bank of England speeches and the upcoming UK budget on October 28th.

Early in the week, concerns over France’s public finances drove French bond prices down and yields up, briefly weakening the euro and boosting the pound. However, as French bonds recovered, yields fell, easing fears of financial stress spreading to other indebted nations.

In the UK, Bank of England officials have maintained a hawkish tone, with markets pricing an 80% chance of a November rate hike, according to Reuters. Morgan Stanley warns that the October 28th budget could be a bigger near-term driver for the pound. If the budget signals higher borrowing than expected, investors may demand higher yields on long-term UK government bonds, increasing currency-hedging costs for overseas buyers and potentially weighing on the pound.

Morgan Stanley has highlighted the $1.285 GBP/USD level as a key marker for fiscal risk ahead of the budget. When a major budget is approaching, sterling often reacts more to potential gilt supply than to interest rate expectations, making levels like this a critical reference for traders.