Pound heading in the right direction to return to pre-Brexit ranges after hitting two-and-a-half yr excessive towards the euro

The pound has been tipped to return to levels last seen before the Brexit vote after reaching its strongest point against the euro for nearly three years.

As sterling rose to €1.2157 against the single currency – its highest since March 2022 – a senior foreign exchange trader in the City said it could reach €1.30 next year.

The pound was last at those levels before Britain voted to leave the European Union in June 2016.

The prediction came as the European Central Bank (ECB) looks set to cut interest rates in the eurozone to 3 per cent today in a bid to kick-start the moribund economy, which has been dragged down by crises in Germany and France. 

And the Federal Reserve is also on course to cut rates in the US next week after official figures showed that inflation ticked up only marginally from 2.6 per cent in October – to 2.7 per cent in November.

By contrast, the Bank of England is expected to leave interest rates in the UK unchanged at 4.75 per cent next week, to the disappointment of millions of borrowers.

Rally: Sterling has risen to €1.2157 against the single currency – its highest level since March 2022

Lower interest rates tend to weaken a currency, so the prospect of a rate cut in the eurozone – but not the UK – has pushed the euro down against the pound.

Neil Jones, managing director at foreign exchange specialist TJM, said he expects interest rates in the eurozone to fall to 1.5 per cent next year from 3.25 per cent before today’s expected reduction to 3 per cent.

‘The ECB is very much on the trajectory of almost collapsing interest rates, perhaps to emergency levels,’ he told the BBC.

‘We know that the political and economic disarray in Germany and France will push the ECB lower.

‘Meanwhile, the Bank of England is likely to remain on hold, certainly for December. But you can see how interest rates in the UK and the pound are destined to remain higher. I’m looking for €1.30-plus, so a revisit to pre-Brexit levels.’

Jones conceded that he was in ‘a minority’ in his forecast but he claimed that the ‘vast majority’ of people will agree with him within months.

Chris Turner, global head of markets at ING, said that should the pound rise above €1.22 there will be ‘many reports of sterling returning to pre-Brexit levels’. He added: ‘We think sterling can continue to perform well over the coming months.’

Joe Tuckey, head of currency analysis at Argentex, said: ‘Reaching the €1.30 levels last seen pre-Brexit is feasible but would probably represent a best-case scenario.

‘Achieving such levels would probably rely on eurozone fundamentals becoming considerably worse than they are right now.’