(Bloomberg) -- The pound was poised for its biggest slide in almost two years after Governor Andrew Bailey hinted the Bank of England will take a more aggressive approach to lowering interest rates.
Sterling slumped over 1% against the euro as bond traders bet on quicker interest-rate cuts over the coming year. Bailey said the central bank could become a “bit more aggressive” and “a bit more activist” in its approach to cutting rates if the news on inflation continued to be good.
His 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 to take advantage of that rates differential, with hedge funds’ long position hovering near the highest since 2018, according to CFTC data.
“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.”
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 70% chance of a consecutive reduction in December — from about 40% on Wednesday.
The repricing boosted gilts, which gained even as European and US bonds fell. The two-year UK yield fell four basis points to 3.98%. Sterling slumped over 1% to 0.8411 per euro, the most on a closing basis since December 2022, and dropped 1% versus the dollar to $1.3108, the most since March 2023.
Still, the pound is the best-performing Group-of-10 currency this year, up 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.
“I think one should be cautious in putting too much weight on these comments, noting the hawkish commentary from the latest statement and 8-1 vote for an unchanged decision in September,” said Kirstine Kundby-Nielsen, an analyst at Danske Bank. “A gradual pace of cutting remains the BOE base case.”
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.
(Updates with additional context throughout.)
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