Sterling soared to its strongest level against the euro since before the 2022 mini budget crisis on Wednesday. The pound remained steady while the euro dropped following disappointing
German regional inflation data.
The euro fell by as much as 0.3% to 84.48 pence, its lowest since August 2022. It also weakened against the dollar after analysts at Capital Economics indicated that the data suggested "both German and euro-zone (harmonised consumer price) inflation may come in a bit lower than expected."
Against the dollar, the pound held steady at $1.2762, just shy of a two-month high reached the previous day.
The pound has been buoyed by signs of an improving British economy and the Bank of England's unlikely rate cuts before August at the earliest. On a trade-weighted basis, the pound is at its highest since June 24, 2016, the day of the Brexit vote, according to the latest BoE data from Friday.
MUFG FX analysts noted, "This could be cited as evidence of market participants embracing the end of the Conservatives' time in power and welcoming a new Labour government, but in all likelihood, this is more about yield!"
Following last week's persistent services inflation data, markets postponed their expectations for the first Bank of England rate cut to September, causing British government bond yields to rise.
Recent economic data, including a rebound in British retail sales in May, have also supported the pound, according to MUFG. "We continue to see a build-up of evidence pointing to a real GDP recovery that is more robust than expected as the UK finally works through the energy price shock from 2022-23."
The pound's strength on a trade-weighted basis is also due to currency weakness in Asia. Sterling hit a nine-month high against China's offshore yuan on Tuesday and reached its highest level since 2008 against Japan's struggling yen. Photo by Abxbay, Wikimedia commons.
