Reuters Sterling hovered around its highest levels in almost three months against the euro on Tuesday, as markets raised their bets on rate cuts by the European Central Bank, which widened their divergence with the Bank of England.

Higher interest rates attract investors39; demand and boost the value of a currency.

Money markets fully price in more than 140 bps of ECB rate cuts next year from around 135 bps the day before with the first move in March, while almost fully discounting a first BoE cut in June 2024.

Sterling was flat at 85.80 pence per euro. It retraced earlier this week after hitting its highest since Sept. 11 on Friday at 85.60 pence per euro as analysts have mixed views about the policy path of the ECB and the BoE.

When it comes to EURGBP, the drop appears to be overdone, and we expect a gradual dovish repricing in Bank of England rate expectations to favour a rebound above 0.8600, although that may not happen in the very short term, said Francesco Pesole forex strategist at ING.

Dovish commentary from the ECB has now seen investors expecting a deeper easing cycle in the euro zone than in the UK.

BofA recently argued that BoE will likely stay on hold for most of 2024, and markets finally see signs that the message that rates might have to stay high for an extended period is finally being heard.

The British public39;s expectations for inflation over the medium to long term, which the Bank of England closely watches, rose in October, supporting a…