The pound has reached its highest level against a basket of currencies since the day of the Brexit referendum on 23 June 2016, with the Bank of England's effective exchange rate index (EERI) hitting 86.5372. The rally reflects a weakening US dollar after Democrats' strong midterm showing, expectations of a BoE rate hike at noon, and a broader risk-on move across global markets. Sterling's strength is real but conditional — it is being purchased with tighter monetary policy that is already visibly damaging the domestic economy. The BoE is near-certain (98% market probability) to raise Bank Rate from 3.75% to 4%, with Deutsche Bank forecasting a 6-3 MPC split favouring hawks. Analysts broadly expect a second hike to 4.25% by February 2027, though markets are pricing as many as three additional rises next year. Professor Costas Milas of the University of Liverpool forecasts a peak at 4.25% in mid-2027, rising to 4.6% only if inflation proves sticky at 4.2% through early 2028. Deutsche Bank expects BoE forecasts to show inflation hitting 4.25% by Q1 2027 and 2026 growth upgraded to 1.4%. The construction sector is already buckling. The S&P Global Construction PMI dropped to 43.6 in October from 46.1 in September — the lowest since June and deep in contraction territory. Residential activity collapsed to 35.1, the weakest since December 2025, with builders citing low consumer confidence, risk aversion, and rising borrowing costs. Vistry confirmed it is cutting headcount and warned that housing demand remains subdued. The BoE is raising rates into a sector that is actively shrinking. Energy markets are providing a rare source of relief. Brent crude fell below $100 to around $95, a two-month low, after JD Vance blamed the Iran war for Republican midterm losses — a signal that Trump may seek de-escalation. UK month-ahead gas prices dropped 2% to 214.2p per therm, the fourth consecutive daily decline, though wholesale gas remains more than double pre-war levels. Europe's oil and gas stocks fell 2% to a one-month low. Financial markets are broadly euphoric. The FTSE 100 jumped 119 points to 10,948 — a three-month high — adding to Wednesday's 190-point gain and approaching July's record. The index is up roughly 10% year-to-date. UK 10-year gilt yields fell 4 basis points below 5.1%, the lowest since late August, with 30-year yields at their lowest since early July. Jim Reid of Deutsche Bank attributed the rally to relief that midterm results weren't disputed and the prospect of divided US government constraining fiscal expansion. Retailer Next posted an 8.1% rise in full-price Q3 sales, though all outperformance came from international operations. ASOS guided core profit above expectations despite a cyber attack. These pockets of corporate resilience stand in sharp contrast to the housebuilding collapse. The fundamental tension is structural: the BoE is hiking to fight an energy-driven inflation shock it cannot control, supporting sterling and bond markets at the direct expense of construction, housing, and domestic consumption. As ING's James Smith notes, the Bank made a 'hawkish misstep' back in March and will tread carefully — but the market is already pricing a tightening cycle that the real economy may not survive intact. Isio's Ajith Nair cautions that markets may be complacent about Trump's remaining powers on trade and foreign policy despite a divided Congress.
