Sterling was on track for its biggest fall in more than a year after Bank of England Governor Andrew Bailey suggested the Bank of England could take a more aggressive approach to lowering interest rates.
(Source: Yihuitong)
On Thursday (October 3), the pound fell more than 1% against both the euro and the dollar after Bailey said that as long as inflation remains subdued, the central bank may be “a little more aggressive” and “a little more aggressive” in cutting interest rates. Traders are betting that interest rates will be cut sooner, reducing the pound’s appeal.
Bailey’s comments in an interview with the Guardian had a huge impact on markets, as there had been speculation for months that Britain would lag behind other countries in easing policy. Investors have placed bullish bets on sterling to take advantage of the spread, with hedge fund bets hovering near their highest levels since 2018, according to data from the Commodity Futures Trading Commission.
Valentin Marinov, head of G10 FX strategy at Credit Agricole in London, said: “The best days of the pound’s rise may be over. The pound remains overbought and slightly expensive against the dollar and euro.”
UK government bonds rose despite losses in European and US bonds, with UK two-year bond yields falling 4 basis points to 3.98%. Sterling fell 1.1% against the euro to 0.8418, its highest close since December 2022. Sterling fell 1.1% to $1.3118, its biggest drop since March 2023.
Last month, British officials voted to keep interest rates on hold amid concerns about continued price pressures in services. Bailey himself called for a “gradual approach” to reversing the central bank’s most aggressive tightening policy in decades.
But his latest remarks encouraged traders to re-examine the pace of easing in the UK. Money markets have fully expected a 25 basis point interest rate cut in the UK in November. The probability of consecutive interest rate cuts in December is 70%, compared with only about 40% on Wednesday. .
bearish bet
Hedge funds spent the next month betting against the pound in options markets, according to European traders. Implied volatility for the pound against the dollar in the week ahead rose to its highest level since early January on Thursday, suggesting traders are seeking protection from sharp moves.
Michael Metcalf, head of macro strategy at State Street Global Markets, said: “There is plenty of room now if investors want to re-establish short positions on sterling. That’s where the weakness lies.”
Still, sterling remains the best-performing G10 currency this year, rising about 3% against the dollar and euro, and some analysts are skeptical that Bailey’s comments signal a dovish turn by the Bank of England.
Kirstine Kundby-Nielsen, an analyst at Danske Bank, said: “I think people should treat these comments with caution and note the hawkish rhetoric in the latest statement and the 8-1 vote to keep interest rates on hold in September. The Bank of England’s The basic forecast is still to gradually cut interest rates.”
Later this month, the ECB is also expected to cut its policy rate amid worsening business surveys, easing price pressures and the Federal Reserve’s shift to easing policy. Eurozone policymakers have cut interest rates twice this year, and markets expect another 170 basis points of cuts by the end of 2025, which would bring deposit rates below 2%.
