Sterling strengthened to its highest level against the euro in nearly two years on Tuesday, climbing by 0.3 per cent to reach €1.21.
The pound’s rise comes amid intensifying expectations that the European Central Bank (ECB) will reduce interest rates further this week, as Europe’s largest economies struggle for momentum.
The ECB is widely tipped to announce its fourth rate cut this year on Thursday, in a bid to reignite growth across the 20-member currency bloc and steer inflation back to target. By contrast, the Bank of England, which has lowered rates twice in 2024, is not expected to alter borrowing costs at its meeting this month.
“The market’s focus is firmly on downside growth risk and the likelihood that inflation will return to target by 2025,” said Kenneth Broux, foreign exchange analyst at Société Générale. The ECB’s key borrowing rate could be trimmed by another 25 basis points on Thursday, taking it down to 3 per cent. Some analysts have even floated the possibility of a more aggressive 50-basis-point cut, although the likelihood of such a move is currently estimated at less than 30 per cent.
A slowdown in key eurozone economies, notably Germany and France, has weighed on the region’s outlook. France is grappling with political uncertainty after the collapse of its minority government over a failed budget, while US President-elect Donald Trump’s threats to impose tariffs on European imports have introduced fresh global trade tensions.
Nadia Gharbi, senior economist at Pictet Wealth Management, expects the ECB to deliver a series of rate cuts until mid-2025, ultimately bringing the main policy rate down to 1.75 per cent. “Risks around our baseline path are skewed towards lower rates, given downside risks to growth,” she said.
With the ECB poised to ease further and the Bank of England holding steady, investors are increasingly drawn to sterling’s relative yield advantage, providing support to the pound as economic and political challenges unsettle the eurozone.