The pound rebounds as the market bets on tighter policy from the Bank of England.

⑴ The pound rebounded against the US dollar and the euro from multi-month lows on Monday as investors priced in monetary policy tightening by the Bank of England amid rising inflation pressures. ⑵ The pound last rose 0.1% against the dollar to $1.3259, higher than last week’s three-month low of $1.3204. However, it is still expected to fall more than 2% this month as the dollar has strengthened sharply on expectations of Fed tightening. ⑶ The pound gained 0.2% against the euro to 85.75 pence, after hitting its weakest level since July 1 on Friday. ⑷ The Bank of England has not yet tightened policy, in contrast to other central banks including the Fed and the European Central Bank, who have responded to energy-driven inflation by raising rates. ⑸ Oil prices rose over 3% on Monday and UK benchmark natural gas prices increased by a similar margin after Trump rejected Iran’s proposal to reopen the Strait of Hormuz and end the Middle East conflict. ⑹ Rising energy prices and a more hawkish outlook among Bank of England policymakers have led investors to price in policy tightening starting next month. ⑺ Bank of England Governor Bailey said last Friday that persistently high energy prices will make it harder for the Bank to keep rates unchanged, while Deputy Governor Ramsden stated on Monday that if upward inflationary pressures continue to build, there may be grounds for a rate hike. ⑻ Currency market futures are pricing in an 85% chance of a 25-basis-point hike to 4% at the November meeting, and are pricing in a total of four hikes by mid-next year. ⑼ According to a forex strategy chief at an institution, a rate hike could offer the pound near-term support, especially if accompanied by UK interest rates stabilizing. ⑽ The UK is now slowly turning its focus to government finances ahead of the October 28 Autumn Budget. On Monday, Chancellor Healey is expected to address the Labour Party annual conference, outlining plans to drive growth, reduce unemployment, and cut welfare spending through investments in sectors such as defence. ⑾ Shares of UK housebuilders surged sharply on Monday after the government said a new equity loan scheme would be confirmed in next month’s budget. Some forex analysts said this could also be supporting the pound, as the jump in housebuilder shares could attract unusually large inflows of foreign capital. ⑿ From a market perspective, the pound is currently supported in the short term by rate hike and fiscal expectations, but the strong dollar and energy prices remain key variables. Upcoming events to watch include the Bank of England’s November meeting and details of the Autumn Budget.