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The pound hovered close to its highest level against the euro since the Brexit vote, as the European Central Bank cut interest rates and investors bet on diverging fortunes for the UK and Eurozone.
The euro dipped as low as £0.8224 on Thursday, 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 from around £0.76 in June 2016, when the UK voted to leave the EU.
The euro then regained ground and was up 0.4 per cent by late afternoon trading at £0.8263. But it has still fallen more than 4 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, cut its rate by a quarter point on Thursday to 3 per cent. However, investors broadly expect the Bank of England to keep its benchmark lending rate steady when it meets next week.
Most traders expect the ECB to lower its rate by a further 1.25 percentage points by the end of next year, while the BoE is only expected to cut by around 0.75 percentage points over that time, according to levels in swaps markets.
The pound’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”.
But against the dollar, which has rallied against global currencies since Donald Trump won the US presidential election, the pound still remains some way short of its pre-referendum levels, having touched $1.50 in the hours before the Brexit vote outcome was announced.
It was trading at $1.2696 on Thursday, down 0.4 per cent on the day, after gains earlier this year were broadly wiped out by a dollar advance on the US election result.
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