Sterling extends gains to three-week high against euro

Sterling rose in European trade on Wednesday against a basket of major rivals, extending gains for the seventh straight session against euro and scaling a three-week high on concerns about a widening interest rate gap between the UK and Europe.

Investors still expect Bank of England to raise interest rates by 25 basis points this year while the ECB will likely hold rates unchanged this year.

EUR/GBP

EUR/GBP fell over 0.15% to 0.8622, the lowest since September 20, with a session-high at 0.8643, after rising 0.1% yesterday, the sixth profit in a row, and the longest such streak of daily gains since February. 

Interest Rate Gap

The current interest rate gap between the UK and Europe stands at 75 basis points, the lowest since March 2022, however it'll likely rise to 100 basis points before the year end. 

That's especially so if the inflation and wages data released next week in the UK carried positive surprises, which would bolster Bank of England's chances of another interest rate hike. 

Conversely, the European Central Bank has reliably reached a peak with interest rates in September and will likely abstain from further policy tightening. 

The EU economy faces increased struggles due to the neighboring war in Ukraine, which could prompt the ECB to cut interest rates faster than the BoE next year.