Pound hovers at its highest level against the euro since the Brexit vote

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The pound hovers around its highest level against the euro since the Brexit vote ahead of Thursday’s European Central Bank meeting, as investors bet on divergent fortunes for the UK and eurozone.

The euro fell as low as £0.8224 ahead of the ECB’s interest rate decision, bringing it closer to the £0.8201 hit in March 2022. Breaking that level would mark the strongest level for sterling since its dramatic drop in June 2016, when the United Kingdom voted to leave the EU.

The euro subsequently strengthened 0.1 percent on the day, settling at £0.8241. It has fallen almost 5 percent since the beginning of this year, hit by a bleak economic outlook in Germany, political turmoil in France and the prospect of further interest rate cuts.

“Sterling has been the least loved of all the G10 currencies,” said Kamal Sharma, senior currency strategist at Bank of America. He added that while “there has been a lot of noise” in recent years, citing Brexit and the unfortunate mini-budget, “this has changed now. . . “We have more political stability in the UK, we have a clearer path.”

The ECB, which will ease policy at a faster pace than its U.K. and U.S. peers as it tries to boost the ailing eurozone economy, is expected to cut its rate by a quarter point on Thursday, although markets estimate roughly one point in five possibilities in a half point cut. However, investors generally expect the Bank of England to hold its benchmark interest rate steady when it meets next week.

Traders generally expect the ECB to cut 1.5 percentage points by the end of next year, while the BoE is only expected to cut 0.75 percentage points over that time, based on levels in swap markets.

The rise in sterling “points to the fact that, in the absence of banana peels, sterling is on a long-term recovery trajectory,” said Joe Tuckey, head of currency analysis at Argentex. This was due to a “comparatively brighter economic outlook and a less dovish central bank,” he added.

Some analysts said the comparative stability of UK politics was helping the relative strength of sterling against the euro, as uncertainty swirls in big eurozone economies such as France and Germany, as well as economic differences.

“There is a huge divergence between economies, both in terms of growth trajectory and central bank policy,” said Sonali Punhani, a British economist at Bank of America.

This is boosting the relative attractiveness of sterling assets. The U.K. still “has very sticky domestic inflation and markets expect (the country) to lag behind other nations in the speed at which they cut rates,” said Craig Inch, head of cash and rates at Royal London. Asset Management, compared to the ECB. which is “firmly in rate-cutting mode.”