Expectations are growing that the pound will rise significantly next year, reaching its highest level against the euro since 2016, according to forecasts by Bank of America. The bank estimates that sterling will reach 80 pence per euro, the strongest level since the Brexit referendum, and expects it to rise to $1.38 by the end of 2025. This projected rise is attributed to a combination of economic factors that distinguish the UK from the Eurozone, as Britain’s economic performance remains strong compared to the EU.
One of the main factors that will contribute to this rise is the difference between monetary policy in the UK and the Eurozone. The UK experiences relatively high interest rates, which increases the attractiveness of the pound compared to other currencies.
In addition, the British government has provided fiscal stimulus that supports economic activity, which boosts the growth outlook for sterling. Bank of America expects the Bank of England to cut interest rates by 100 basis points over the next year, reflecting a conservative response to potential economic problems.
On the European side, markets expect the ECB to cut interest rates by 150 basis points, reflecting a more flexible monetary policy compared to Britain. These differences in monetary policy contribute to the support of the British currency against the euro.
In addition, political developments are also expected to affect the trajectory of the pound. The British prime minister may visit Saudi Arabia and the United Arab Emirates to discuss a new trade deal, which could strengthen economic ties with these countries and support the British economy in the future. All these factors combined reinforce expectations of a stronger pound against major currencies, including the euro and the US dollar.
Reasons for the rise of the sterling against the euro
The rise in the pound against the euro is due to a combination of economic and political factors that affect the strength of the two currencies. Notable among these factors is the economic performance of both the UK and the Eurozone.
If the UK is experiencing stronger economic growth compared to the Eurozone, this could increase the attractiveness of the pound to investors, pushing it higher against the euro. This includes improved indicators such as GDP, unemployment rate, and growth rates in vital sectors of the economy. Monetary factors also play a crucial role, as central bank policies significantly affect the price of a currency.
If the Bank of England decides to raise interest rates or keep them at high levels, it strengthens GBP.
On the other hand, political influences also contribute to currency fluctuations. For example, after the Brexit referendum and the political challenges that followed the UK’s departure from the EU, there was uncertainty about the future of the UK-EU relationship.
However, any progress in reaching trade deals or an improvement in the political situation could contribute to the stability and strengthening of the pound. There is also a significant role for external factors such as shifts in commodity prices and the movement of global markets.
A potential rise for the pound against the euro could be supported by a positive outlook for the UK economy compared to the euro, along with a more restrictive monetary policy from the Bank of England compared to the European Central Bank, which ultimately leads to an improvement in the value of sterling in financial markets.
How the Euro Rise Affects Investors
The rise in the price of the euro can significantly affect investors in various financial markets. When the euro rises against other currencies, including the US dollar and the pound sterling, this has various effects on investing in different assets. For equity investors, a stronger euro could be positive for European companies that generate significant revenues from abroad.
For example, companies that export their products to other countries may benefit from an increase in the value of the euro, increasing their revenues when Convert it to local currency. On the other hand, the rise of the euro can pose a challenge for investors in the bond markets. If the euro rises significantly, European bonds may become more expensive for foreign investors who own other currencies.
This may lead to lower demand for European bonds, which could affect their prices and the yields they offer.
For investors in the Forex markets, the rise in the price of the euro is an opportunity to make profits from currency trading. When the euro rises, investors can take advantage of price movements in their favor by buying the euro and selling it at higher levels.
The rise in the price of the euro may also affect commodity markets. Euro-denominated commodities, such as oil and gold, may become more expensive for overseas investors if the euro rises. This may lead to fluctuations in commodity prices that many investors rely on.
In addition, the euro’s rise affects capital flows into the euro. If the value of the euro is high, it may be more attractive for foreign investors to pump their money into European markets, increasing liquidity in those markets and supporting European assets.
