In the latest financial developments, the British pound reached its highest level against the euro in two and a half years, influenced by the Bank of England's relatively hawkish stance and political uncertainties in France and Germany. However, the pound experienced a decline against a strengthening U.S. dollar. The euro fell to 82.35 pence, marking its lowest point since March 2022, but slightly recovered to 82.50 pence later in the day.
The possibility of the euro dropping to its lowest level against the pound since the Brexit referendum outcome on June 24, 2016, was highlighted, with the current political and economic climate in the Eurozone contributing to this speculation. Jane Foley, head of FX strategy at Rabobank, commented on the ongoing discussions regarding the euro's potential return to its pre-referendum levels, attributing this to the European Central Bank's (ECB) focus on growth challenges and political issues in France and Germany.
Despite criticisms of the UK's economy and budget, the existence of a budget and the expectation for the Bank of England to maintain a cautious approach have provided some sterling support. The Bank of England is anticipated to keep rates steady in the upcoming week and remain cautious throughout the next year, with markets expecting a few rate cuts. In contrast, the ECB is predicted to reduce rates in its next meeting, with further cuts expected throughout the first half of 2025.
Economic growth concerns at the core of the eurozone and political factors are influencing the ECB's dovish stance. Recent political developments, including the collapse of the French government and Germany's governing coalition, have added to the euro zone's challenges. Meanwhile, the pound's performance against the dollar weakened, with a 0.34% drop, as the dollar gained strength amid concerns over potential U.S. inflation data impacting Federal Reserve rate cut expectations.
Source: Reuters