(Bloomberg) -- The pound rose to the strongest level against the euro in almost two years as the Bank of England is increasingly expected to trail the European Central Bank in lowering interest rates.

Sterling jumped as much as 0.3% to 84.84 pence against the common currency, the highest since August 2022. The latest move comes after data showed inflation in May slowed across Germany’s regions compared to a month ago, a sign the trajectory for monetary policy could diverge further.

“A window has now opened that could see the pound continue to perform well,” said Derek Halpenny head of global markets research for EMEA at MUFG.

Markets are currently only fully pricing one quarter-point reduction from the BOE this year, which is expected by November. The ECB meanwhile is seen lowering rates as early as next month, and is expected to deliver at least two reductions by December.

The pound is the best-performing currency in the Group of 10 this year, rising around 2% against the euro. Its rally gathered pace last week after the UK reported faster-than-expected inflation, which put a dent in bets on rate cuts from the Bank of England.

The BOE is widely expected to wait until after elections in July before making any changes in policy, further cementing the view that rates in the UK will stay unchanged for longer. 

That’s putting a lid on volatility and bolstering the currency’s appeal for carry traders, who pile into higher-yielding securities to harness returns. A gauge of the pound’s implied price swings over the next two months is trading near multi-year lows. 

“In these circumstances, the pound could well draw in more carry interest,” MUFG’s Halpenny said.

(Adds analyst comment starting in second paragraph, data on volatilty in the penultimate paragarph.)

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