(Bloomberg) — The pound suffered its biggest single-day drop against the euro since late 2022 after Governor Andrew Bailey suggested the Bank of England could take a more aggressive approach to cutting interest rates. was recorded.
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Sterling weakened against both the euro and dollar after Mr Bailey said the central bank could be “a little bit more aggressive” and “a little bit more aggressive” in its rate-cutting approach if inflation remains subdued. It fell by about 1%. Traders will now bet on a faster price drop, making the currency less attractive.
Mr Bailey's comments in an interview with the Guardian had a huge impact on the market. This is because the UK has been expected to lag behind its peers in terms of easing policies for several months. Investors have placed bullish bets on the pound to take advantage of the interest rate differential, with hedge fund bets hovering near their highest since 2018, according to data from the Commodity Futures Trading Commission.
“The best days for the pound's strength may be behind us,” said Valentin Marinov, head of 10-country and regional currency strategy at Credit Agricole in London. “The pound remains overbought and looks slightly expensive versus the dollar and euro.”
Gilts rose even as European and US government bonds fell, with UK two-year bond yields falling nearly 5 basis points to 3.97%. The pound fell 1% to $0.8405 to the euro, the steepest decline since December 2022. The British currency fell 1.1% against the dollar to $1.3124.
British officials voted last month to keep interest rates on hold amid concerns about lingering price pressures in the services sector. Governor Bailey himself has called for a “step-by-step approach” to reverse the bank's most aggressive tightening in decades.
But his latest comments have prompted traders to reconsider the pace of UK easing, with money markets starting to fully price in a quarter-point rate cut in November, with the possibility of a further cut in December. There is definitely a sex.
bearish bet
Hedge funds have rushed to short the pound in options markets over the next month, European-based traders said. The pound's implied volatility against the dollar for next week rose on Thursday to its highest level since early January, indicating traders are seeking protection against volatility.
“If investors want to re-establish short sterling, there is now plenty of room,” said Michael Metcalfe, head of macro strategy at State Street Global Markets. “Therein lies the vulnerability.”
Still, the pound has been the best performer of the G10 currencies this year, gaining about 3% against the dollar and euro, and some analysts believe Mr. Bailey's comments signal a dovish move at the British central bank. Some people are skeptical that it is.
The ECB is expected to cut interest rates as early as later this month on the back of deteriorating economic surveys, declining price pressures and reassurance from the Fed's focus on easing. Eurozone policymakers have cut interest rates twice this year, and markets are pricing in an additional 170 basis points of easing by the end of 2025, which would push deposit rates below 2%.
–With assistance from Ruth Carson, Sujata Rao, Anya Andrianova, Guy Collins, and Carter Johnson.
(Update market price.)
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