Thanks to the Bank of England's shift to hawks, the pound is about to enter a new period of strength against the euro.
Traders' expectations for an interest rate hike in February rose to 60 per cent; the Bank of England made it clear last week that the countdown to an era of ultra-low borrowing costs would begin. That gives the pound the potential to break through £0.85 to the euro, its highest level since February 2020, a barrier it has failed to break since early April.
The pound rose 4.2 per cent against the euro in the first half, the biggest gain since 2015, but has stalled recently. The number of Covid-19 infections in the UK has soared over the past month, forcing once-bullish investors to rethink the outlook for sterling. Now, with the rebound in manufacturing and services indices prompting the Bank of England to raise its growth forecast, the future of sterling is brightening.
"whenever the UK economic data are better than expected, it adds fire to the pound's rally," said Savvas Svori, chief economist of the Tosca Fund Asset Management. "the Bank of England should raise interest rates earlier than most Gmur10 countries, and sterling should benefit, especially against the euro."