The pound rose to its highest level against the euro in almost two years on Tuesday, rising 0.3 percent to €1.21.
The pound’s rise comes amid growing expectations that the European Central Bank will cut interest rates further this week, as Europe’s largest economies struggle for momentum.
The European Central Bank is widely expected to announce its fourth interest rate cut this year on Thursday, in an attempt to revitalize growth across the 20-member currency bloc and get inflation on target. By contrast, the Bank of England, which cut interest rates twice in 2024, is not expected to change borrowing costs at its meeting this month.
“The market focus is firmly on negative growth risks and the possibility of inflation returning to target by 2025,” said Kenneth Brough, foreign exchange market analyst at Société Générale. The European Central Bank’s main borrowing rate could be cut by another 25 basis points on Thursday, to 3 percent. Some analysts have even raised the possibility of a more aggressive cut of 50 basis points, although the probability of such a move is currently estimated at less than 30 percent.
The slowdown in the eurozone’s major economies, especially Germany and France, has weighed on the region’s prospects. France faces political uncertainty after the collapse of the minority government due to a failed budget, while US President-elect Donald Trump’s threats to impose tariffs on European imports have led to new global trade tensions.
Nadia Gharbi, chief economist at Pictet Wealth Management, expects the ECB to deliver a series of interest rate cuts until mid-2025, eventually lowering its key interest rate to 1.75 percent. “The risks around our fundamental path are skewed toward lower interest rates, given the downside risks to growth,” she said.
With the European Central Bank set to ease further and the Bank of England holding firm, investors are increasingly attracted to the pound’s relative yield advantage, providing support to the pound at a time when economic and political challenges are destabilizing the eurozone.