Sterling bounces off two-year low on euro, soft on dollar

LONDON (Reuters) -The pound briefly hit a two-year low versus the euro on Monday, before rebounding, and dipped on the dollar, though its moves were largely a function of those elsewhere as investors digested the announcement of an EU-U.S. trade deal.

The pound was last down 0.2% on the dollar at $1.34185, its lowest in a week, having struggled late last week because of soft British retail sales and business activity data.

The pound was more volatile against the euro, which rose as high as 87.69 pence in early Asia trade, its highest since May 2023, as its gains last week were extended in a kneejerk bounce after the announcement of the trade deal.

The common currency then reversed course, both broadly, and on the pound, as investors speculated that U.S. trade deals, in aggregate, would boost the dollar and so the euro's gains at its expense would cease. [FRX/]

On the pound the euro was last down 0.5% at 86.99 pence.

Investors are divided on sterling, partly due to disagreement on whether the Bank of England will step up the pace of its rate cuts later this year, something that would weigh on the currency.

Inflation in Britain has proven sticky, meaning policymakers are loath to cut rates too quickly unless they are forced to, and recent data - soft but not terrible - has not yet definitively answered that question.

"Another round of only modestly weaker data than expected were enough to push sterling to fresh lows versus the euro," said Barclays analysts in a note.

"In our view, the pound's weakness is overdone and due a correction," they said, anticipating that the euro will fall to around 85 pence, which would be consistent with the gap between British and euro zone interest rates.

Others expect that more BoE cuts, while the ECB now appears to be on hold, would hurt the pound against the euro. Nomura analysts see the euro rising to 89.75 pence.

Little British economic data is due this week. The BoE meets next week, and markets are all but fully pricing in a 25 basis point rate cut, one of only two more they expect this year.

(Editing by David Holmes)