brits fancying a trip to Paris, Rome or Madrid are quids in.
At one point on Wednesday, it took less than 74 pence to buy one euro, meaning the pound was at its strongest versus the common currency in seven years.
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The Bank of England’s trade-weighted sterling index rose above 90 for the first time since 2008.
Good for UK tourists but not great for foreign currency-earning UK-listed corporates — one reason why the FTSE 100 is still to surpass its record highs of late 1999.
Just like with the US dollar, the pound is being supported by interest rate differentials reflecting a better economic performance than European peers and expectations for coming monetary tightening in the UK.
The BoE’s base rate is 0.50 per cent and “short sterling futures” (though not a perfect indicator) suggest this may rise to 0.73 per cent by September.
Consequently, the spread between policy-sensitive two-year Bund and gilt yields is 63 basis points in favour of the latter.
This is the backdrop for the BoE’s Inflation Report, released on Thursday.
Fixed income and currency traders should be wary lest governor Mark Carney says anything to shift policy trajectory expectations.
Any moves versus the euro may be amplified should they be accompanied by developments regarding the Greek bailout negotiations.
