Pound Hits A 2.5-Year High Against Euro, Set to Reach Pre-Brexit Levels.

The pound is looking like it might bounce back to levels we haven't seen since before the Brexit vote, especially after hitting its highest point against the euro in almost three years.

Sterling climbed to €1.2157 against the euro, the best it’s been since March 2022, and a senior forex trader in the City thinks it could hit €1.30 by next year.

The last time the pound was at those heights was right before the UK voted to leave the EU back in June 2016.

This optimistic outlook comes as the European Central Bank (ECB) is expected to lower interest rates in the eurozone to 3 percent today to help revive the struggling economy, which has been affected by issues in Germany and France.

Meanwhile, the Federal Reserve is also likely to cut rates in the US next week after recent data showed inflation only rose slightly from 2.6 percent in October to 2.7 percent in November.

On the flip side, the Bank of England is anticipated to keep interest rates steady at 4.75 percent next week, which might not sit well with many borrowers.

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A drop in interest rates usually makes a currency less valuable, and since there's talk of a rate cut in the eurozone but not in the UK, the euro has slipped against the pound.

Neil Jones, who runs foreign exchange firm TJM, believes that eurozone interest rates will drop to 1.5 percent next year, down from 3.25 percent, following today’s anticipated cut to 3 percent.

‘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 admitted he’s in the minority with his prediction, but he believes that soon enough, most people will see things his way.

Chris Turner, who leads the global markets team at ING, mentioned that if the pound goes over €1.22, we can expect to see a lot of chatter about sterling bouncing back to its pre-Brexit values. He also noted, “We believe sterling has the potential to keep doing well in the next few months.”

Joe Tuckey, the head of currency analysis at Argentex, stated that hitting the €1.30 mark, which we haven’t seen since before Brexit, is possible, but it would likely be the best-case scenario.

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

The pound's recent surge against the euro highlights a potential return to pre-Brexit levels, offering optimism for the UK economy. However, this positive shift doesn’t overshadow the broader challenges Brexit has imposed.

The decision to leave the EU has led to ongoing trade disruptions, a decline in foreign investment, and regulatory complexities that continue to hamper growth. While interest rates in the UK remain higher than in the eurozone, the long-term effects of Brexit, including reduced market access and labor shortages, remain a significant concern. The economic uncertainty Brexit has caused is still deeply felt, despite short-term gains in currency value.

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