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The pound is hovering close to its highest level against the euro since the Brexit vote ahead of Thursday’s European Central Bank meeting, as investors bet on diverging fortunes for the UK and Eurozone.
The euro dipped as low as £0.8224 ahead of the ECB’s interest rate decision, putting it close to the £0.8201 hit in March 2022. Moving past that level would mark the strongest level for sterling since its dramatic fall in June 2016, when the UK voted to leave the EU.
The euro was later 0.1 per cent stronger on the day at £0.8241. It has fallen nearly 5 per cent since the start of this year, weighed down by a bleak economic picture in Germany, political upheaval in France and the prospect of further interest rate cuts.
“Sterling has been the least loved of all G10 currencies,” said Kamal Sharma, senior FX strategist at Bank of America. He added that while there “had been a lot of noise” over the past years, citing Brexit and the ill-fated mini-Budget, “this has changed now . . . we have more political stability in the UK, we have a clearer path.”
The ECB, which is expected to ease policy at a faster pace than its UK and US peers as it tries to boost the flagging Eurozone economy, is widely forecast to cut its rate by a quarter point on Thursday, although markets place a roughly one in five chance on a half point cut. However, investors broadly expect the BoE to keep its benchmark lending rate steady when it meets next week.
Overall, traders expect the ECB to cut by 1.5 percentage points by the end of next year, while the BoE is only expected to cut by 0.75 percentage points over that time, according to levels in swaps markets.
Sterling’s rise “points towards the fact that, in the absence of any banana skins, sterling is on a long-term recovery trajectory,” said Joe Tuckey, head of FX analysis at Argentex. This had been driven by a “comparatively brighter economic outlook, and a less dovish central bank”, he added.
Some analysts said the comparative stability of UK politics was helping sterling’s relative strength against the euro, as uncertainty swirls in big Eurozone economies such as France and Germany, as well as the economic differences.
“There is a big divergency between the economies both in terms of path of growth and path of central bank policy,” said Sonali Punhani, UK economist at Bank of America.
This is boosting the relative attraction of sterling assets. The UK still “has very sticky domestic inflation and the markets expect the [country] to lag other nations in the speed to which they cut rates”, said Craig Inches, head of cash and rates at Royal London Asset Management, compared with the ECB which is “firmly in rate-cutting mode”.
