Sterling hovered around its highest levels in almost three months against the euro today, as markets raised their bets on rate cuts by the European Central Bank, which widened their divergence with the Bank of England.
Higher interest rates attract investors' demand and boost the value of a currency.
Money markets fully price in more than 140 bps of ECB rate cuts next year -- from around 135 bps the day before -- with the first move in March, while almost fully discounting a first BoE cut in June 2024.
Dovish commentary from the ECB has now seen investors expecting a deeper easing cycle in the euro zone than in the UK.
BofA recently argued that BoE will likely stay on hold for most of 2024, and markets finally see signs that the message that rates might have to stay high for an extended period is finally being heard.
The pound was down 0.1% against the U.S. dollar, which regained some ground and hovered near a one-week high ahead of key economic indicators later this week.
We still think that a convergence towards the key 1.2500 and even the 100 and 200-day MA at 1.2470 are more likely than a further rally given room for a dollar rebound, although US data means risks are quite binary.
