Pound gains against dollar, euro as inflation data cements future rate hike bets

By Shashwat Chauhan

Oct 21 (Reuters) - The pound rose slightly against both the euro and the dollar on Wednesday after a hotter-than-anticipated inflation reading solidified bets of a Bank of England interest rate hike next month.

Sterling was last up 0.1% at $1.339, holding near its highest level in about a month. It rose 0.2% against the euro, up for the fifth straight session and at its strongest in 17 months, pinning the European common currency down at 83.80 pence.

Consumer price inflation rose to 3.5% after a 3.1% increase in August, the Office for National Statistics said. Economists polled by Reuters had forecast a rise of 3.4% in the 12 months to September as the surge in energy prices caused by the Iran war gathered steam.

This comes after data on Tuesday showed British workers have seen another modest rise in the pace of pay growth and there were other hints of a small recovery in the jobs market.

"Strong growth, stable or falling labour market slack and surging inflation mean the MPC will hike in November. We expect another hike in February and are very close to adding a third in May, or earlier," Pantheon Macroeconomics economists said in a note.

Money market data showed traders are nearly fully pricing in a 25-basis-point rate hike in November. Expectations currently are for four rate hikes by the middle of next year, according to LSEG-compiled data.

The pound has gained close to 2% against the euro this month, on pace for its best monthly showing since May 2023. It has also gained almost 1% against the dollar so far this month.

The euro has suffered against most currency pairs recently, with traders remaining cautious on the single currency as France grapples with widespread anti-government protests and a worsening fiscal outlook that has pushed its 10-year borrowing costs towards 24-year highs.

Focus would now be on British finance minister John Healey's first budget, which is to be delivered next week.

Earlier this month, Healey said his budget would include measures to reinforce the resilience of Britain's economy to the Iran war energy price shock and offer "a bit of breathing space" to the country.

"The key question for markets is whether the low-key budget does little to dent any credibility ahead of bigger spending, tax and borrowing decisions next year," Deutsche Bank economists said in a note.