06:36 AM EDT, 03/20/2025 (MT Newswires) -- Sterling (GBP) has outperformed alongside other European currencies this month benefitting from the significant improvement in investor sentiment towards the region, said MUFG.

It has helped to lift cable back up above the 1.3000 level for the first time since last year's United States presidential election, wrote the bank in a note to clients. In contrast, sterling has weakened modestly against the euro (EUR) lifting EUR/GBP back above the 0.8400 level for the second time this year.

The euro is expected to benefit more than sterling from Germany's plans for looser fiscal policy, stated MUFG.

Market participants now expect monetary policies between the European Central Bank and Bank of England to diverge less going forward which has helped to narrow yield spreads in favor of a stronger euro, pointed out MUFG. At the ECB's last policy meeting, it left the door open for further modest rate cuts with the policy rate now closer to the neutral estimate put forward by President Christine Lagarde between 1.75% and 2.25%.

Based on the bank's assumption that legislation will be passed Friday to boost fiscal policy in Germany, it will ease pressure on the ECB to lower rates below neutral. The main risk to that view would be a much bigger hit to growth in Europe from U.S. President Donald Trump's upcoming plans for trade tariffs in early April.

The United Kingdom economy is still expected to be less negatively impacted by tariffs than major eurozone economies boosting the relative appeal of sterling.

Market attention will now shift to the BoE's updated outlook for policy on Thursday. Ahead of Thursday's Monetary Policy Committee meeting, the U.K. rate market is still expecting the BoE to stick to the current quarterly pace of rate cuts by delivering the next rate cut in May -- 19bps of cuts priced in -- but there is less confidence over a further rate cut in August -- 37bps of cuts priced in, added MUFG.

It's helping to keep yields in the U.K. at higher levels than on offer in other major economies providing sterling support. Ahead of Thursday's MPC meeting, U.K. economic data has been improving except for Friday's softer U.K. gross domestic product report for January.

Overall it points to strengthening growth momentum since late year. At the same time, the slowdown in services inflation and wage growth remains frustratingly slow, according to the bank. It was revealed earlier Thursday that private sector wage growth excluding bonuses remained strong at 6.1% 3Mth/YoY in January.

It will become even more uncomfortable for the BoE to keep cutting rates heading into the summer when inflation is expected to temporarily pick up towards 4.0%. Overall, MUFG still believes that sterling remains attractive.