The British pound has hit its highest level against the euro since April 2022, driven by expectations that the Bank of England (BOE) will be less aggressive in cutting interest rates than the European Central Bank (ECB).
On Tuesday, sterling strengthened by 0.3% to 82.50 pence per euro. Meanwhile, UK government bonds, known as , saw a decline, with the 10-year bond yield rising to 4.33%, the highest since November 28.
Market players expect the BOE to keep interest rates at the current level at its policy meeting next week, with a cautious approach to any further rate cuts. UK economic growth remains strong, and inflation remains high in some sectors.
In contrast, the ECB is expected to cut borrowing costs by 0.25 percentage points on Thursday to support the eurozone economy.
Going into 2025, the interest rate differential between the UK and the eurozone is expected to widen further. Rates indicate a reduction of 80 basis points by the BOE and about 125 basis points by the ECB.
The euro's weakness is also due to other factors, including the potential impact of US trade tariffs on exports of goods from the region as well as political instability in France and Germany.
