LONDON: Sterling was within striking distance of its highest level in more than 2-1/2 years against the euro on Friday as investors bet the European Central Bank would follow a faster monetary easing path than the Bank of England.
The BoE cut interest rates on Thursday for the second time since 2020 and said future reductions were likely to be gradual, as it predicted the British government’s first budget would lead to higher inflation and economic growth.
Last week’s budget, with its heavy borrowing and spending, prompted investors to dial back their bets on the pace of further rate cuts.
Investors expect the ECB to be more dovish than the BoE as the euro-zone economy is likely to be hit harder than the UK’s if incoming US President Donald Trump implements higher tariffs when he takes office on Jan. 20.
However, analysts’ views about the BoE easing path and its impact on the British currency remained mixed.
“We think there is a gap to be filled on the dovish side in the Sterling Overnight Index Average’s (Sonia) curve,” said Francesco Pesole, forex strategist at ING.
SONIA is the risk-free reference rate for the sterling market.
“Such repricing may, however, take some time to show, and the rate/growth differential with the euro zone means there should be continued resistance on a substantial shift higher in the euro/sterling cross,” he added.
The pound was down 0.05% at 83.24 pence per euro.
In mid-October, it hit 82.97 pence, its highest level since April 2022.
Rabobank sees the UK bank rate at 3.75% at the end of 2025 and no rate cut in December.
Money markets expect the ECB deposit and facility rate to fall to 2% by June from the current 3.25%.
Sterling was down 0.25% against the dollar at $1.2956.
Lee Hardman, senior forex strategist at MUFG, said he expected the euro to move closer to support from the 0.8200 level, which the pair hasn’t traded below since the initial fallout from the Brexit referendum in June 2016.
He also sees the bullish implications for the US dollar from a Trump victory and the likely Red Sweep, which will cap further upside for cable beyond the 1.3000 level.