UK Inflation Rises to 3.5% as Pound Hits 16 Month High Against Euro

Key Highlight

• UK inflation remains stubbornly high. Annual inflation rose to 3.5% in September, above the 3.4% forecast. Services inflation also exceeded expectations, while core inflation held at 2.8%, strengthening expectations of further Bank of England rate rises.
• Sterling reaches a 16-month high against the euro. Strong UK employment data and rising French borrowing costs have supported the pound, while concerns over France’s finances continue to weigh on the euro.
• The US dollar weakens. Reports of a potential new proposal to restart Iran ceasefire talks pushed oil prices and US borrowing costs lower, taking the dollar to its weakest level in three weeks.

Market Recap

UK factory input prices increased by 8.3% over the year, exceeding the 7.6% forecast and signalling further inflationary pressure. Government borrowing reached £24.5 billion in September, the highest figure for that month since 2021. The deficit for the first half of the financial year is now £6 billion above official forecasts, adding pressure ahead of the 28 October Budget.

In the eurozone, European Central Bank policymaker Olli Rehn acknowledged the widening gap between French and German borrowing costs, highlighting growing concerns over France’s financial position.

Meanwhile, Reserve Bank of Australia Deputy Governor Andrew Hauser warned that the inflation outlook was materially worse than anticipated in August, increasing the possibility of an interest rate rise in November.

Market Overview

British Pound (GBP)

Higher than expected inflation, rising factory costs and strong employment data have strengthened expectations that the Bank of England could raise interest rates again in November, with further increases possible. However, Sterling’s limited reaction to the latest inflation figures suggests markets had already anticipated much of the news.

Attention now turns to Bank of England Governor Andrew Bailey’s comments and the government’s upcoming Budget. With borrowing already above forecasts, the Chancellor has limited room for manoeuvre, while persistent inflation adds another challenge for policymakers.

Euro (EUR)

The euro remains under pressure as French political uncertainty and rising borrowing costs undermine investor confidence. The gap between French and German government borrowing costs has widened, reflecting concerns about France’s public finances.

The European Central Bank’s outlook and President Christine Lagarde’s latest comments remain important for the currency. Unless France makes progress towards a credible budget agreement, financial uncertainty could continue to weigh on the euro.

US Dollar (USD)

The dollar fell to a three-week low following reports of a possible renewed effort to restart Iran ceasefire talks. The prospect of reduced geopolitical tensions pushed oil prices and US borrowing costs lower, easing support for the currency.

Looking ahead, interest rate expectations remain an important driver. Markets continue to anticipate further Federal Reserve rate increases into next year, which could support the dollar relative to the euro if the gap between US and eurozone interest rate expectations persist.

What This Means for Your International Payments

GBP/EUR: Pound strength could benefit businesses and individuals buying euros. Sterling is trading at a 16-month high against the euro, although the move is extended and further gains may be more gradual. The UK Budget on 28 October remains a key event that could influence the exchange rate.

GBP/USD: Sterling faces competing pressures. Persistent UK inflation and the prospect of further Bank of England rate rises could support the pound, but expectations of similar rate increase from both the Bank of England and Federal Reserve leave the outlook uncertain.

EUR/USD: The euro remains vulnerable. French financial concerns continue to weigh on the currency, while differences in expected US and eurozone monetary policy could add to downward pressure.

If you are planning an international payment, these movements could affect how much you pay or receive when exchanging currencies. Monitoring the market and considering your payment timing can help you understand the potential impact on your costs.

21st October 2026

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