Sterling hits five-month high against euro before BoE decision

LONDON, (Reuters) – The pound rose to a five-month high against the euro on Wednesday as traders bet a rate hike from the Bank of England on Thursday will not be the last.

The euro fell to 86.73 pence earlier in the session, the lowest since Dec. 15. It was last little changed at 86.84 pence.

Against the dollar, the pound was last down very slightly at $1.262, just below the one-year high of $1.267 reached on Monday.

Sterling has rallied around 22% since tumbling to a record low of $1.0327 in September, including a 4.6% rally this year. It remains around 17% below its level 10 years ago, however.

A better-than-expected – although still lacklustre – economic performance has supported sterling, as has a relatively sharp fall in the dollar as U.S. inflation has cooled.

Expectations that the Bank of England will have to keep raising interest rates to bring down stubborn inflation have also boosted the pound.

The BoE is expected to hike rates by 25 basis points tomorrow to 4.5%, the highest level since 2008. Pricing in derivatives markets shows that traders expect rates to peak at more than 4.8% in September.

Investment banks have become more upbeat about the pound in recent weeks as the currency has rallied.

Barclays analysts told clients on Sunday that “another hike from the BoE should be supportive for GBP”.

Goldman Sachs on Friday said it was now “constructive” on the pound.

“We think that the same factors that acted as headwinds on Sterling in 2022 – mostly natural gas prices and the relative stance of BoE policy – have turned to tailwinds,” its analysts wrote.

However, Deutsche Bank strategist Shreyas Gopal took a contrary view in a note on Wednesday, saying the rally had likely run out of steam.

“Having been bullish on the pound since the start of the year, we no longer think the pound presents attractive risk-reward in the short term,” Gopal wrote.

(Reporting by Harry Robertson; Editing by Angus MacSwan)