Sterling hits highest stage towards the euro since August 2022

The pound has continued its solid gains against the euro since the start of the year this week, with sterling now trading at a 22-month high against the eurozone currency.

Sterling overcame an initial dip in the wake of a higher UK unemployment rate to add nearly 0.3 per cent against the euro to €1.19 yesterday, having risen by around 2.8 per cent since the start of 2024.

The move is driven by Eurosceptic gains in EU Parliament elections and French President Macron’s decision to call a snap domestic poll on Monday. 

But sterling’s gains against the euro so far in 2024 have largely been the result of shifting expectations of when central banks will opt to cut interest rates.

How far will the pound take British holidaymaker’s this summer? 

The ECB moved last week to cut rates for the first time in five years, while markets price just a 7 per cent probability of a Bank of England cut at next week’s Monetary Policy Committee meeting and a 46 per cent chance of one in August.

Similarly, the US dollar has shown strength this year as expectations for the first Federal Reserve rate cut are pushed even further back to November. 

Sterling is down by around 0.8 per cent against the greenback since the start of 2024.

So, as Britons prepare for their summer holidays, how far will their pound go against the two major currencies?

French woes could spell more trouble for the euro

Prior the global financial crisis, Britons could expect the pound in their pocket to go much further in the eurozone. Sterling traded consistently at €1.40 to €1.50 between 2003 and 2007.

In the wake of the crash, the pound almost hit parity with the euro at around €1.04 in early 2009. The pound trades more than 13 per cent above that level now, but remains some 16.8 per cent short of its 2015 peak of €1.42.

Britain’s departure from the European Union has weighed on the currency, but sterling is still up more than 8 per cent on its post-Brexit-vote trough of around €1.09 in August 2017.

Chris Turner, of ING, said the bank expects European authorities to soon take action on France’s economic situation, which would have implications for the euro.

The French economy will struggle to achieve 1 per cent growth this year, which in turn is hitting its public finances, ‘and is set to narrow only slightly this year and next’, he added.

The pound has performed well against the euro this year 

Sterling is roughly 16.8 per cent short of its 2015 peak of €1.42

Turner said: ‘The European Commission may well launch its Excessive Deficit Procedure against France. How the next French government responds to that will impact the euro.

‘Needless to say this is not an attractive proposition for the euro – fiscal consolidation or a possible French debt crisis should warnings from Brussels be ignored.’

However, ING thinks a BoE rate cut this summer is ‘much more likely’ than markets are currently pricing. If the bank is right, the pound would likely fall ball against the euro.

Dollar strength set to fade 

British holidaymakers pre-global financial could reliably get close-to, and sometimes more than, $2 to the pound.

This peaked at $2.05 in October 2007.

Having plummeted to $1.38 by January 2009, the pound now stands some 9 per cent below that level at $1.27 – albeit a significant improvement on the measly trough of $1.08 in September 2022.

The dollar’s 2024 strength has largely been the result of stronger than expected economic figures – most notably including May’s bumper jobs data – combining with sticky inflation data to deter the Fed from beginning its interest rate cutting cycle.

The pound traded at a peak of $2.05 in October 2007 

The pound has held firm against US dollar strength this year 

Its perceived role as a ‘safe haven’ asset has also held it in good stead during a shaky geopolitical period.

However, analysts at UBS said they don’t expect the dollar ‘to rise markedly above its recent range’ and can see ‘several reasons why the latest bout of strength for the greenback is unlikely to last’.

Mark Haefele, investment chief for global wealth management at UBS, said there are ‘signs the [US] labour market is cooling’, which is ‘consistent with other recent economic data—on everything from job openings to credit card spending—that point to a slowing US economy’.

He added: ‘The Fed should feel sufficiently confident that inflation is headed sustainably back to its 2 per cent target to start cutting rates later this year, most probably at the September policy meeting.

‘USD is not cheap and stands at levels comparable to the mid-1980s or the early 2000s, leaving limited room for further upside, in our view.

‘In the absence of extreme events, like the Ukraine-Russia war and the blowout in natural gas prices in 2022, we struggle to call for a further USD rise beyond this year’s ranges.’