30 May Sterling rises to 21-month high against euro as rate cut bets fade
Sterling has risen to a 21-month high against the euro as more persistent price pressures in the UK have prompted investors to bet that the Bank of England will start lowering interest rates much later than its Eurozone counterpart.
The pound nudged up 0.03 per cent yesterday to trade at a high of £0.8482 per euro, a level last seen in August 2022.
Sterling has now gained 2 per cent against the common currency since the start of the year as investors push back expectations for BoE rate cuts at a time when the European Central Bank remains on track to reduce borrowing costs next month.
The pound has been “really cheap” since 2016’s vote to leave the EU, meaning even relatively minor shifts in expectations for monetary policy can spark significant gains.
The pound has been boosted as the UK economy has performed better than many had expected while lingering inflation concerns have increased the prospect of UK interest rates styaing higher for longer.
Investors said sterling had also been supported by the prospect of an imminent election with optimism that a change in government could help to alleviate the political uncertainty that has weighed the currency down in recent years.
UK inflation fell to a three-year low of 2.3 per cent las week but the services component, seen as an indicator of underlying price pressures in the economy and closely followed by the BoE, was 5.9 per cent – significantly higher than economists had forecast.
Markets have all but ruled out a rate cut next month, having been evenly split on the prospect at the beginning of last week.
Meanwhile, the ECB remains on track to start cutting rates on June 6 and is expected to deliver at least two quarter point reductions by the end of the year.
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