LONDON, Oct. 26 (Reuters) – The British pound hit a new 20-month high against the euro on Tuesday, driven by diverging interest rate expectations for Britain and the eurozone, although concerns on economic growth and ties with the EU kept the currency broadly stable over the day.

Money markets are anticipating a rate hike from the Bank of England at its November 4 meeting, helping the pound to rebound around 2% against the euro and the dollar since the start of the month.

The euro, meanwhile, is harassed by signs that the European Central Bank (ECB) will be among the last to raise interest rates in the developed world. Monday’s data showing German corporate morale deteriorating for the fourth consecutive month in October raised expectations for a dovish message from Thursday’s ECB meeting.

At 08:50 GMT, the British pound was trading at 84.2 pence against the euro, 0.2% firmer on the day to the highest since February 2020, while against the dollar it was slightly firmer at $ 1.378, after hitting five-week highs hit last week.

However, weak economic data from Britain – including the unexpected drop in retail sales last Friday – capped the pound’s gains. Short-term gilt yields have also slipped from 17-month highs reached last week, with growing fears that an impending policy tightening could exacerbate the slowdown.

“Euro-sterling is trading near the low of its post-referendum low on BoE hike expectations. But UK growth momentum is weakening, which could lead to a shift between the euro and the pound sterling, ”Bilal Hafeez, director of consulting firm MacroHive, told clients.

There are also concerns about potential tax hikes that could be exposed in Wednesday’s budget announcement, alongside EU-UK feuds over the arrangements governing post-Brexit trade between Britain, the UK. Northern Ireland and Ireland, member of the European Union.

Britain has threatened to take unilateral action if a solution cannot be found in the ongoing talks, which some believe could turn into a serious headwind for the pound.

“The uncertainty surrounding the UK’s relationship with the EU could intensify in the coming days and possibly serve as a check on bets on the BoE’s rate hike next week or at the December meeting,” as well as setting a short-term floor on the euro-sterling, ”Scotiabank analysts wrote, pointing to levels around 84.20 to 84.5 pence.

Another headwind for the UK economy could be the rise in the trade-weighted exchange rate of the pound sterling, which closed on Monday just after the five-and-a-half-year highs reached on Friday.

Traders are now awaiting the budget statement from Finance Minister Rishi Sunak on Wednesday, although his plans for increased corporate tax and national insurance contributions as well as additional spending are already known.

Reporting by Sujata Rao; Editing by Subhranshu Sahu