The British pound recently plunged more than 1% against both the U.S. dollar and the euro following comments from Bank of England (BoE) Governor Andrew Bailey, suggesting that if inflation data remains positive, the central bank may take a more aggressive approach to rate cuts. In an interview with The Guardian, Bailey indicated that the BoE could become “a bit more activist” in its approach to monetary policy, leading to weakened market support for sterling.
Sterling’s Sharp Decline
On October 3, during trading in London, the pound fell by as much as 1.3% against the dollar, marking its steepest daily decline in over 20 months. By the afternoon, sterling slightly pared its losses but remained near its lowest levels since September 12. Meanwhile, sterling also dropped 1.1% against the euro, hitting its lowest level since September 20.
Bailey's comments sparked market expectations of a quicker pace of rate cuts from the BoE, causing the sharp decline in the pound. Previously, markets had anticipated a more gradual pace of monetary easing, but Bailey's remarks suggest that consecutive rate cuts could be on the horizon in the coming months.
Bank of England’s Monetary Policy
At its September meeting, the BoE held the key interest rate steady at 5%, following a 25-basis-point rate cut in August. Although headline inflation has neared the 2% target, concerns remain about inflation in the services sector and strong wage growth. Bailey’s latest comments hint that the central bank may be ready for more aggressive easing in the upcoming meetings in November and December.
Markets are now pricing in two more 25-basis-point rate cuts by the end of the year. Deutsche Bank FX strategist Shreyas Gopal noted that Bailey’s remarks could mean that inflation would need to show significant improvement to prevent back-to-back rate cuts. Bailey also warned that escalating tensions in the Middle East could lead to higher oil prices, creating new inflationary pressures that the market may not yet have fully accounted for.
Inflation Risks and Market Outlook
While Bailey's remarks about potentially faster rate cuts garnered the most attention, Rabobank FX strategist Jane Foley cautioned that inflation risks remain a key factor for the BoE's decisions. Even without considering the geopolitical risks stemming from the Middle East, domestic inflation in the UK could lead to a slower pace of rate cuts than other central banks. Bailey emphasized that the BoE is closely monitoring the global oil market, particularly with geopolitical tensions adding potential risks.
Overall, the near-term outlook for sterling depends on several factors, including inflation data in the coming weeks and developments in the Middle East. Analysts predict that the pound could weaken further, potentially dropping to the $1.30 level, especially if the BoE continues to take a dovish stance while U.S. interest rates rise.
Conclusion
The British pound faced sharp declines following Governor Bailey’s hints of more aggressive rate cuts, with sterling dropping over 1% against both the U.S. dollar and the euro. In the coming months, the focus will be on inflation data and the BoE’s next moves. For forex market participants, closely tracking sterling’s performance and global economic developments will be essential for adjusting investment strategies accordingly.
