LONDON: Sterling is poised to gain further against the euro, with the Bank of England expected to flag this week that interest rates may rise sooner than thought, just days after eurozone rates were cut.
The fact investors are even talking about the possibility of rates rising from their current 0.5 percent highlights the contrast between the UK and the eurozone, where borrowing costs were cut to a record low of 0.25 percent last week.
UK rates are higher than those in the euro zone for the first time since late 2008, and this should make sterling more appealing to investors than the euro.
Analysts said this could push the euro down towards 82 pence by year-end, though ebbing debt worries in the euro zone are likely to prevent a rapid fall towards the early January low of 80.86 pence.
The first target for the single currency, which is more than 4 percent below a peak hit in late February, will be the 10-month low of 83.00 pence it hit just after the ECB rate cut.
It has since rebounded to around 84 pence.
“The Bank of England Inflation Report may give euro/sterling a bit of additional impetus for the next leg lower,” said Jane Foley, senior currency strategist at Rabobank.
After a raft of strong UK data, many analysts expect the BoE will bring forward its forecast for when unemployment hits 7 percent, the threshold at which it has said it may raise interest rates, perhaps by two quarters.
In August the BoE forecast this would happen in late 2016.
But sterling overnight interbank average rates (SONIA) already price in a risk of a rate hike in the first half of 2015.
“The better-than-expected data from the UK has highlighted that the Bank of England is one of the least dovish central banks,” said Valentin Marinov, currency strategist at Citi. Reuters
