Sterling rises towards highest in over 2-1/2 years versus euro

Sterling rose against the euro towards its highest level in over 2-1/2 years as investors expect the European Central Bank to cut rates and provide some dovish guidance on Thursday, with the Bank of England seen keeping its current policy next week.

BoE Governor Andrew Bailey was quoted as saying Britain’s central bank has incorporated four rate cuts in 2025 into its most recent economic forecasts.

Meanwhile, markets expect the ECB to cut by 25 bps on Thursday and to deliver more than 100 bps of cuts by July 2025. Analysts expect US tariffs to hurt the euro area’s economy and the single currency.

However, the impact on the United Kingdom is unclear, as BoE policymaker Megan Greene argued.

The budget of British Prime Minister Keir Starmer is also in the spotlight.

A BoE survey showed last week more than half of British employers plan to raise their prices and cut jobs in response to the new government’s first budget, under which social security contributions will be increased.

Starmer said he had kept up his ambition for Britain to become the fastest-growing economy in the Group of Seven. Sterling rose 0.15% versus the euro to 82.62 pence per euro.

It hit 82.58 on Nov. 11, its highest level since mid-April 2022.

“This raises the question as to whether sterling can achieve pre-Brexit referendum levels versus the euro in the foreseeable future,” said Jane Foley, senior forex strategist at Rabobank, after recalling that before the Brexit referendum in June 2016, the trading range for EUR/GBP was mainly below 0.80.

Sterling falls to 6-month low

“We anticipate that the euro will be under pressure next year, which is likely to allow EUR/GBP to remain on its slow downside trajectory. This suggests that pre-Brexit levels may creep into the sights.”

Political uncertainty in France and Germany, in addition to a dovish ECB monetary easing path, could weaken the single currency in 2025. Sterling was down 0.05% versus the dollar at $1.2741.

The greenback steadied before Wednesday’s inflation data, with analysts still assessing whether President-elect Donald Trump’s policies will lead the Federal Reserve to tilt to a more hawkish direction after an expected rate cut of 25 bps in the next policy meeting.