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The pound is hovering near its highest level against the euro since the Brexit vote after the European Central Bank cut interest rates by a quarter of a percentage point to 3 percent, as investors bet on diverging fortunes for the United Kingdom and the euro zone.
The euro fell to a low of £0.8224, approaching the £0.8201 level it recorded in March 2022. Exceeding this level would represent the strongest level for sterling Since its dramatic downfall in June 2016, when the UK voted to leave the European Union.
After the decision, the euro rose 0.1 percent during the day to 0.8236 pounds sterling. The currency has fallen about 5 percent since the beginning of this year, affected by the bleak economic picture in Germany, political turmoil in France and the possibility of further cuts in interest rates.
“The British pound was the least popular of all the G10 currencies,” said Kamal Sharma, chief foreign exchange strategist at Bank of America. He added that although there had been “a lot of noise” over the past years, citing Brexit and the ill-fated mini-budget, “that has changed now… We have more political stability in the UK, we have a clearer path.” “.
The European Central Bank, which is expected to ease policy at a faster pace than its counterparts in the United Kingdom and the United States as it tries to boost the faltering euro zone economy, cut its interest rate by a quarter point on Thursday. However, investors widely expect the Bank of England to keep its benchmark lending rate steady when it meets next week.
Overall, traders expect the ECB to cut interest rates by 1.25 percentage points by the end of next year, while the Bank of England is expected to cut by just 0.75 percentage points over that time, according to levels in swap markets.
The rise in sterling “points to the fact that, absent any banana peels, sterling is on a long-term recovery path,” said Joe Tukey, head of FX analysis at Argentex. He added that this was driven by a “relatively brighter economic outlook and a less pessimistic central bank.”
Some analysts said the relative stability of UK policy helped boost the relative strength of sterling against the euro, as uncertainty spreads across major eurozone economies such as France and Germany, as well as economic differences.
“There is a huge divergence between economies in terms of the growth path and the path of central bank policy,” said Sonali Bonhani, a British economist at Bank of America.
This enhances the relative attractiveness of sterling assets. Compared to the European Central Bank, the UK “continues to have very challenging domestic inflation and markets expect (the country) to lag other countries in the speed with which it cuts interest rates,” said Craig Inches, head of monetary and interest rates at Royal London Asset Management. . It is “firmly in interest rate cut mode.”
But against the dollar, which has risen against global currencies since Donald Trump won the US presidential elections, the pound is still well below pre-referendum levels, having touched $1.50 in the hours before the announcement of the result of the vote in favor of Britain's exit from the European Union.
It is currently trading at $1.2725, after gains made earlier this year were widely wiped out by the dollar's advance on the US election result.
