Sterling rolls off three-week top on euro

LONDON (Reuters) – The pound softened slightly on Monday but remained close to its strongest in three weeks against the euro, a level touched the week before on expectations the European Central Bank will cut rates before the Bank of England.

Those expectations, which depend on the British economy holding up better than the euro zone’s, will be tested this week by remarks on Wednesday by Bank of England governor Andrew Bailey before Parliament and monthly GDP data due Friday.

The pound dipped 0.18% against the dollar to $1.2696, slightly nearer the top than the bottom of its recent range.

The euro was at 86.15 pence, up 0.17% on the day and just above from the 85.995 pence hit Friday, the pound’s strongest since mid December.

“As you see economies in the euro zone move to something synonymous with an economic hard landing, you’re seeing the opposite in the UK where the data is painting a more optimistic picture, and we think that’s got room to run,” said Simon Harvey, head of FX analysis at Monex Europe.

An economic hard landing refers to a more severe recession than a soft landing.

“That growth outperformance and the idea that the Bank of England will keep higher rates relatively longer than other central banks, in the short term is very positive for sterling.”

Data last week showed net borrowing by British consumers was the highest in nearly seven years in November – when retail sales leapt – and lenders approved the most mortgages since June.

The final S&P Global/CIPS UK Services Purchasing Managers’ Index also was revised higher last week to show the sector grew more strongly in December than had been thought.

Current market pricing shows reflects a 75% chance of a 25 basis point BoE rate cut in May, and they are fully pricing one such cut by June.

In contrast markets have fully priced a 25 bp ECB rate cut by April.

(Editing by Angus MacSwan)