Pound Sterling Today: GBP/EUR, GBP/USD Slide on Dovish BoE Bailey Rhetoric

October 4, 2024 - Written by David Woodsmith

STORY LINK Pound Sterling Today: GBP/EUR, GBP/USD Slide on Dovish BoE Bailey Rhetoric

The pound dipped sharply in Asian trading on Thursday following a media interview by Bank of England Governor Bailey.

Bailey hinted at a faster rate of interest rate cuts and, in response, the Pound to Euro (GBP/EUR) exchange rate sliding to 1.1905 from just above 1.20.

The Euro-Zone PMI services-sector business confidence index was revised higher to 51.4 from the flash reading of 50.5 which also had some positive Euro impact.

Stronger expectations of an ECB rate cut this month should, however, offer significant Pound protection.

In a wide-ranging interview, Bank of England Governor Bailey expressed concerns over developments in the Middle East and the risk of a spike in oil prices.

Bailey said he was encouraged by the fact that cost of living pressures had not been as persistent as the Bank thought they might be. He said if the news on inflation continued to be good there was a chance of the Bank becoming more “a bit more activist” in its approach to cutting interest rates, now at 5.0%.

Markets have fully priced in a November rate cut and expect rates to decline to 3.75% by the middle of next year.

MUFG commented; We altered our view on the BoE to assume back-to-back rate cuts before year-end given our view that the economy was now showing clearer evidence of decelerating economic growth.”

The bank quoted recent evidence on the economy; “Sentiment indicators are now turning lower – the GfK consumer confidence index, the PMIs, the CBI Orders index, the Lloyds Business Barometer have turned lower pointing to weaker growth and the potential for a further softening in underlying inflation.”

MUFG also considered the global outlook; “With the Fed and ECB also likely cutting at back-to-back meetings before year-end the damage for the pound should not be considerable. Still, long GBP has been a popular and fruitful trade this year and there is a risk of a downside correction especially if financial market volatility was to pick-up on increased risk aversion.”

On Wednesday, ECB council member Schnabel commented that a “Return to 2% target in a timely manner is becoming more and more likely despite elevated services inflation and strong wage growth.”

She added that; “Signs of softening labor demand and progress in disinflation suggest inflation could sustainably fall back to the 2% target.”

She did note that elevated services inflation and strong wage growth persist, but added; "We cannot ignore the headwinds to growth.”

According to ING; “This could be a sign that the hawks are throwing the towel on the October debate, and will accept another cut after the lower-than-expected CPI figures earlier this week.

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TAGS: Pound Sterling Forecasts