LONDON: Sterling touched a new 20-month high against the euro on Tuesday, driven by diverging interest rate expectations for Britain and the eurozone, though concerns over economic growth and EU ties kept the currency broadly flat on the day.
Money markets are pricing in a rate hike by the Bank of England at its Nov. 4 meeting, helping the pound rally around 2 oercebt versus the euro and the dollar so far this month .
The euro, meanwhile, is being dogged by signs the European Central Bank will be among the last to raise interest rates in the developed world. Monday data showing German business morale deteriorating for the fourth month running in October, cemented expectations of a dovish message from Thursday’s ECB meeting.
By 0850 GMT, sterling traded at 84.2 pence to the euro, 0.2 percent firmer on the day at the highest since February 2020, while against the dollar it was marginally firmer at $1.378, having come off five-week highs touched last week.
However, Britain's weak economic data — including last Friday’s unexpected drop in retail sales — has capped the pound’s gains. Short-dated gilt yields too have slipped from 17-month highs hit last week, with fears growing that impending policy tightening will exacerbate the slowdown.
“Euro-sterling is trading close to the bottom end of its post-referendum low on BoE hike expectations. But UK growth momentum is weakening, which could see euro-sterling turn,” Bilal Hafeez, head of the MacroHive consultancy, told clients.
There are also concerns around potential tax hikes that may be unveiled in Wednesday's budget announcement, alongside EU-UK wrangling over provisions that govern post-Brexit trade between Britain, Northern Ireland, and EU member Ireland.
Britain has threatened to take unilateral action if a solution cannot be found at the ongoing talks, which some reckon could emerge as a serious headwind for the pound.