Market News
Pound Closes at Eight-Year High Versus Euro on Split Rates Views - BLOOMBERG
(Bloomberg) -- The pound closed at its strongest level against the euro in more than eight years and UK government bonds fell on the view that the Bank of England will cut interest rates less aggressively than the European Central Bank.
Sterling strengthened 0.4% to end the session at 0.82427 per euro on Tuesday, a closing mark last seen in June 2016 in the days following the UK’s Brexit vote. Gilts fell across the curve, with the yield on 10-year notes rising more than five basis points to finish the day at 4.32%, the highest since Nov. 26.
Traders expect the BOE to stay on hold in its last policy meeting of the year next week, and remain cautious about lowering rates further. UK growth remains robust and inflation is still elevated in some sectors. The ECB, meanwhile, is widely seen cutting borrowing costs by a quarter point on Thursday to support the bloc’s economy.
“The big 0.8200 level is looming large,” said Brad Bechtel, global head of FX at Jefferies, referring to the next big technical level for the euro-pound cross. “It is pretty clear the BOE will remain well behind” the ECB in the pace and extent of interest-rate cuts, he added.
The interest-rate differential between the UK and the euro area is expected to widen further next year. Swaps imply 80 basis points of easing from the BOE in 2025 and about 125 basis points from the ECB.
The euro has also been dragged lower by the risk of US trade tariffs hitting the region’s goods exports. Political turmoil in the bloc’s two biggest economies are also clouding the outlook for growth.
“Monetary policy trend between the ECB and BOE favors a lower euro-pound,” said Elias Haddad, senior markets strategist at Brown Brothers Harriman. “Political paralysis in France and Germany means the ECB will have to do the heavy lifting to support the euro zone economy.”
--With assistance from Greg Ritchie and Carter Johnson.
(Updates with latest pound move in lede, second paragraph.)
