Sterling Soars: BoE and ECB Rate Forecasts Shake Currency Markets

Sterling is gaining against the euro as investors expect the ECB to cut interest rates, while the BoE maintains its current policy. Analysts highlight potential impacts on the euro area and the UK's unclear response. The spotlight is also on Britain's budget and social contributions.

The sterling surged against the euro, reaching its highest point in over two and a half years. This upward trajectory comes as investors anticipate the European Central Bank's rate cuts and dovish guidance, contrasting with the Bank of England's steady policy approach.

Bank of England Governor Andrew Bailey acknowledged the incorporation of four rate cuts into the central bank's economic forecasts for 2025. In contrast, market expectations have the European Central Bank cutting rates by 25 basis points imminently, with more reductions anticipated by mid-2025.

Meanwhile, the impact of U.S. tariffs on the eurozone remains a concern, though the effect on the UK is still being debated. BoE policymaker Megan Greene highlighted the unclear dynamics, while Prime Minister Keir Starmer's budget, emphasizing social contributions, drew significant domestic attention.

(With inputs from agencies.)