The British pound has maintained its position near the highest level against the euro since the Brexit referendum, driven by the European Central Bank’s interest rate reduction and market expectations of diverging economic trajectories between the UK and Eurozone.
The European single currency dropped to £0.8224 on Thursday, approaching the £0.8201 mark witnessed in March 2022. Breaking through this threshold would signify sterling’s most robust performance since its substantial decline from approximately £0.76 in June 2016, following the UK’s decision to exit the European Union.
Despite a modest recovery to £0.8263 in late afternoon trading, representing a 0.4 per cent increase, the euro has experienced a decline exceeding 4 per cent since January. This downward trend reflects Germany’s economic challenges, political instability in France, and anticipated interest rate reductions.
Bank of America’s senior FX strategist, Kamal Sharma, notes a significant shift in sterling’s position. “The UK now benefits from enhanced political stability and a more defined direction, marking a departure from previous uncertainties surrounding Brexit and the mini-Budget,” Sharma observed.
The ECB’s decision to reduce its rate by 25 basis points to 3 per cent contrasts with the Bank of England’s anticipated stance. Market participants expect the BoE to maintain current rates during next week’s meeting, highlighting the diverging monetary policies between the two regions.
Trading data suggests the ECB may implement additional rate cuts totalling 1.25 percentage points by late 2024, while the BoE is projected to reduce rates by approximately 0.75 percentage points during the same period. This disparity in monetary policy outlook continues to support sterling’s strength against the euro.
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