(Bloomberg) -- The pound posted the biggest one-day slide against the euro since late 2022 after Governor Andrew Bailey suggested the Bank of England could take a more aggressive approach to lowering interest rates.
Sterling slumped about 1% against both the euro and the dollar after Bailey said the central bank could become a “bit more aggressive” and “a bit more activist” in its approach to cutting rates — provided inflation stayed subdued. Traders in turn bet on quicker reductions, eroding the currency’s appeal.
Bailey’s remarks in an interview to the Guardian newspaper had an outsized impact on markets because for months the view had been that the UK would lag peers in easing policy. Investors have been piling into bullish bets on the pound to take advantage of that rate differential, with hedge fund wagers hovering near the highest since 2018, according to data from the Commodity Futures Trading Commission.
“The best days of the pound rally may be behind us,” said Valentin Marinov, head of Group-of-10 FX strategy at Credit Agricole in London. “The pound is still looking overbought and slightly expensive versus the dollar and the euro.”
Gilts gained even as European and US bonds fell, with the two-year UK yield dropping nearly five basis points to 3.97%. The pound slumped 1% to 0.8405 per euro, the biggest drop since December 2022. The British currency dropped 1.1% versus the dollar to $1.3124.
UK officials voted to keep rates steady last month amid concern over lingering price pressures in the services sector. Bailey himself has called for a “gradual approach” to reversing the bank’s most aggressive tightening in decades.
But his latest comments encouraged traders to review the pace of easing in the UK, with money markets moving to fully price a quarter-point cut in November and a solid chance of a consecutive reduction in December.
Bearish Wagers
Hedge funds rushed to short sterling in the options market over the next month, according to Europe-based traders. The pound’s implied volatility against the dollar over the coming week rose to its highest since early January on Thursday, showing traders are seeking protection for wild swings.
“There’s now plenty of room if investors want to re-establish sterling shorts,” said Michael Metcalfe, head of macro strategy at State Street Global Markets. “That’s where the vulnerability lies.”
Still, the pound is the best-performing Group-of-10 currency this year, up about 3% versus the dollar and the euro, and some analysts are skeptical that Bailey’s comments signal a dovish shift from the UK’s central bank.
Later this month, the ECB is also expected to slash its policy rate amid souring business surveys, dwindling price pressures and the reassurance offered by the Fed’s pivot to easing. Euro-area policymakers cut rates twice this year and markets are pricing an additional 170 basis points of easing through the end of 2025, which would take the deposit rate below 2%.
--With assistance from Ruth Carson, Sujata Rao, Anya Andrianova, Guy Collins and Carter Johnson.
(Updates market prices.)
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