The British pound strengthened against the euro, nearing its highest level in over two and a half years, as investors anticipate that the European Central Bank (ECB) will cut interest rates and offer dovish guidance on Thursday. In contrast, the Bank of England (BoE) is expected to maintain its current policy when it meets next week. BoE Governor Andrew Bailey has stated that the latest economic forecasts include four rate cuts for 2025.

Markets are expecting the ECB to reduce rates by 25 basis points on Thursday and to implement more than 100 basis points of cuts by July 2025. Analysts foresee that U.S. tariffs could negatively impact the eurozone's economy and the euro itself, though the effect on the UK remains unclear, as BoE policymaker Megan Greene noted.

Attention is also focused on the budget proposed by British Prime Minister Keir Starmer. A BoE survey showed that more than half of UK employers plan to raise prices and cut jobs in response to the government’s new budget, which includes higher social security contributions. Starmer has reiterated his goal of making the UK the fastest-growing economy in the Group of Seven.

Sterling gained 0.15% against the euro, reaching 82.62 pence per euro, approaching its highest point since mid-April 2022, when it hit 82.58 pence. Jane Foley, a senior forex strategist at Rabobank, raised the question of whether sterling could reach pre-Brexit referendum levels against the euro, recalling that before the June 2016 referendum, EUR/GBP mostly traded below 0.80. She predicted that the euro would face pressure next year, which could help EUR/GBP continue its gradual decline and bring pre-Brexit levels within reach.

Political instability in France and Germany, along with a dovish ECB monetary easing stance, may further weaken the euro in 2025.

Sterling dipped 0.05% against the U.S. dollar, trading at $1.2741. The U.S. dollar held steady ahead of Wednesday's inflation data, as analysts continued to assess whether President-elect Donald Trump’s policies would prompt the Federal Reserve to adopt a more hawkish stance following an expected 25 basis point rate cut in the next policy meeting.