Interest rate spread expectations widen, GBP/EUR hits a new high since 2022
Due to the expectation that the Bank of England's interest rate cuts will not be as large as those of the European Central Bank, the British pound rose to its highest level against the euro in two and a half years, trading at 1 euro to 82.50 pence. The pound also increased against the US dollar to 1.2758 dollars, marking its fourth consecutive week of gains. Analysts pointed out that strong economic growth and high inflation in the UK have led the Bank of England to adopt a cautious stance on interest rate cuts. It is expected that by the end of 2025, the Bank of England will ease rates by 82 basis points, with future rates remaining higher than those in the eurozone
The Zhitong Finance APP noted that the British pound rose to its highest level against the euro in two and a half years, as expectations grew that the Bank of England's rate cuts would not be as significant as those of the European Central Bank. The pound rose 0.3% on Tuesday to 82.50 pence per euro, marking its highest level since April 2022. The pound also strengthened against the dollar, outperforming most G7 currencies, trading at 1.2758 dollars.
The pound has risen against the euro for the fourth consecutive week, as traders believe that, given the strong growth of the UK economy and the high inflation rates in some sectors, the Bank of England will take a cautious approach to rate cuts. The European Central Bank is expected to lower borrowing costs again on Thursday and continue to cut rates in the coming months to support the struggling EU economy.
Elias Haddad, a senior market strategist at Brown Brothers Harriman, stated: "The high inflation rate in the UK services sector requires the Bank of England to cautiously implement a cycle of easing policies. In contrast, the political paralysis in France and Germany means that the European Central Bank will have to make significant efforts to support the eurozone economy."
The swap market expects the Bank of England to ease rates by 82 basis points by the end of 2025, significantly lower than the European Central Bank's forecast of 152 basis points. Future interest rates in the UK are expected to remain higher than those in the eurozone.
The euro is also under pressure due to the region's export-oriented economy facing the risk of potential trade tariffs from the US next year. Meanwhile, the UK may be less affected as it relies more on the services sector