The pound rose to its highest level against the euro in nearly two years as the European Central Bank (ECB) prepares to fire the starting gun on global interest rate cuts next week.
Sterling has climbed 0.6 per cent against the euro over the past month, reaching a peak of just under 85p per euro earlier on Wednesday morning.
This put the pound at its highest level against the euro since August 2022.
The move comes as traders expect the ECB to start cutting interest rates next week. At its last meeting in April, the ECB said it would be “appropriate to reduce the current level of monetary policy restriction” if it receives further evidence that inflation is converging to target.
Markets took this to mean that the central bank was preparing for a June interest rate cut. Since then policymakers at the ECB have doubled down on a June rate cut.
On Monday, Olli Rehn, an ECB governing council member, said in a speech that eurozone inflation was falling in a “sustained way” and “the time is thus ripe in June to ease the monetary policy stance and start cutting rates”.
Inflation in the euro area came in at 2.4 per cent in April, nearing the ECB’s two per cent target. The data for May is due to be released on Friday.
Growth meanwhile remains sluggish, with the bloc growing just 0.3 per cent in the first quarter. The European Commission expects the eurozone to expand 0.8 per cent over the course of 2024.
Although the latest data in the UK showed that inflation fell to 2.3 per cent April, the figures showed that underlying price pressures remained strong. Growth has also surprised to the upside.
Reflecting concerns over persistent price pressures, markets are now only fully pricing in one Bank of England interest rate cut this year.
“Market pricing now implies only one full rate cut in the UK before the end of the year and the first move is now expected in September, while in the eurozone a June rate cut is a foregone conclusion and most expect another cut or two in the second half of the year,” Kyle Chapman, FX Markets Analyst at Ballinger Group commented.
Higher interest rates benefit domestic currencies, because international investors are able to earn a higher return on their investments.