Sterling hit a one-month high versus the euro after inflation data from Germany and Spain led investors to increase their bets on European Central Bank interest rate cuts.
Inflation fell in six important German states in August due to lower energy prices, and dropped to its slowest pace in a year in Spain.
The pound was up 0.25% to 84.05 pence per euro, after hitting 84.00, its strongest since July 25.
It was roughly unchanged versus the dollar at $1.3190, having climbed to its highest since March 22 at $1.3269 on Tuesday. It was also on track for a 3.2% rise in August, its biggest monthly gain since November 2023.
The greenback rose, and the euro dropped, after the data.
A cautious monetary policy easing stance from the Bank of England (BoE) has supported the pound since the central bank’s cut to its Bank Rate at its August meeting.
Dollar weakens, sterling hits 2-year high
The BoE will cut rates just once more this year, in November, a majority of economists said in a Reuters poll, as British inflation is expected to stay above target.
UK finance minister Rachel Reeves’ first budget at the end of October is in focus.
Citi’s economists expect a revenue-raising package of around 20 billion pounds ($26 billion) overall, which should weigh on growth through next year.
Prime Minister Keir Starmer said on Tuesday he would have to take unpopular decisions, raising the possibility of “painful” taxes on the wealthy and spending cuts to try to fix Britain’s myriad of problems he blamed on the previous government.
“However, this (20 billion pounds) may not represent fiscal tightening since she will be using the money to address the real-terms cut in public spending under the previous Conservative government,” said Chris Turner, head of forex strategy at ING.
“For sterling, that may mean this is a fiscally neutral budget and one that could see the pound continue to outperform,” he added.
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