The pound has climbed to its highest level against the euro in two and a half years, driven by expectations of interest rate cuts to bolster the struggling European economy.
Sterling has gained strength amid predictions that the Bank of England will hold interest rates steady at its upcoming meeting, even as borrowing costs remain higher in the UK compared to the eurozone.
The euro has fallen to just 82.5p, its weakest value since April 2022, as the European Central Bank (ECB) anticipates lowering rates on Thursday.
This decline comes as the eurozone faces the threat of potential trade tariffs from Donald Trump’s incoming administration, alongside political turmoil in France and Germany, where governments have collapsed.
Money markets project the ECB will reduce interest rates by 152 basis points by the end of next year—equivalent to six quarter-point cuts—taking them from 3.25% to around 1.75%.
In contrast, traders expect the Bank of England to implement just three rate cuts over the same period, bringing rates down from 4.75% to 4%.
Elias Haddad, senior markets strategist at Brown Brothers Harriman, remarked: “Persistently high UK services inflation suggests a cautious approach to rate cuts by the BOE.
“Meanwhile, political deadlock in France and Germany leaves the ECB with the burden of propping up the eurozone economy.”
The pound also edged up 0.1% against the dollar, trading at $1.276.
