Sterling rises against the euro, hits 5-week high vs dollar

By Stefano Rebaudo

Dec 3 (Reuters) - Sterling rose against the euro after two straight declines on Wednesday as investors weighed diverging rate outlooks with the single currency bloc against expectations of a stronger UK economy.

The pound also hit a 5-week high versus a weakening dollar as markets remained focused on the Federal Reserve easing path. With Britain's growth outpacing earlier forecasts, as the OECD said on Tuesday, the Bank of England could slow its monetary easing path, a move that would support the pound.

The single currency had firmed earlier this week as markets strengthened their view that the European Central Bank will stay on hold through 2027, while the Bank of England is expected to cut rates next year.

Traders priced in only about a 30% chance of an ECB rate cut in 2026 and see the deposit rate at 1.95% by December 2026, down from the current 2%, while the Bank of England is expected to deliver around 60 basis points of cuts by the end of 2026.

The euro dropped 0.20% against the pound to 87.80 pence on Wednesday. It hit 87.46 last Thursday, its lowest level since October 28.

"Chancellor Rachel Reeves was able to pull together a smorgasbord of tax increases that collectively are projected to reduce the budget deficit by a wider margin than expected," said Kristina Hooper, chief market strategist at Man Group.

"In other words, she was able to achieve the fiscal credibility that was needed."

Sterling hit a 5-week high against the dollar at $1.3289, and was last up 0.54% at $1.3286.

Analysts argued that the lack of immediate fiscal tightening after the budget does not provide additional impetus for the BoE to cut rates more in the coming years.

Traders also flagged the pound was unaffected by political opponents' accusations that Finance Minister Reeves misled the public ahead of the budget, which she denied.

However, an official from Britain's fiscal watchdog said on Tuesday that her pre-budget speech was not misleading.

(Reporting by Stefano Rebaudo; Editing by Shailesh Kuber)