The British pound faced its steepest decline since late 2022 following remarks by Bank of England (BoE) Governor Andrew Bailey, who hinted at the possibility of more aggressive interest rate cuts. Sterling dropped over 1% against both the euro and the US dollar after Bailey suggested that the central bank could adopt a more “activist” approach to reducing rates, provided inflation remains contained. This unexpected tone led traders to adjust their expectations for quicker rate cuts, denting the appeal of the currency.
Bailey’s comments, made during an interview with The Guardian, surprised many in the market as the general consensus had been that the UK would be slower to ease policy compared to its global peers. Investors have heavily positioned themselves in favor of the pound to benefit from the UK’s higher interest rate differential, with hedge fund positions close to their highest levels since 2018, according to data from the Commodity Futures Trading Commission (CFTC).
“The strongest days for the pound rally may be behind us,” said Valentin Marinov, head of G10 foreign exchange strategy at Credit Agricole in London. “The pound now appears overbought and slightly overvalued compared to both the dollar and the euro.”
Gilts rallied on the back of Bailey’s comments, while US and European bonds saw losses. The yield on the UK’s two-year bonds fell by nearly five basis points to 3.96%. Meanwhile, sterling dropped 1% against the euro to 0.8406 and fell 1.1% against the dollar to $1.3129. This marks the sharpest one-day drop for the currency since December 2022.
Nick Andrews, senior currency strategist at HSBC, noted that upcoming comments from BoE Chief Economist Huw Pill could provide further insights on the central bank’s outlook, particularly whether there will be additional dovish signals. “We expect the market to continue factoring in a more aggressive UK monetary easing cycle, pushing the pound lower,” he said. Andrews added that a break below the $1.30 level against the dollar could see sterling slide to $1.28 by year-end.
The BoE opted to keep interest rates steady last month due to concerns over persistent price pressures in the services sector. Bailey had previously advocated for a more gradual reversal of the central bank’s aggressive tightening cycle, which has been its most significant in decades. However, his latest comments have triggered traders to revise their outlook for the pace of easing. Markets are now fully pricing in a quarter-point cut in November and see a strong chance of another reduction in December.
Hedge funds were quick to act, increasing their short positions on sterling in the options market. The pound’s implied volatility against the dollar for the coming week surged to its highest level since early January, as traders sought protection against potentially significant market swings.
“There’s now plenty of room for investors to re-establish short positions on sterling,” said Michael Metcalfe, head of macro strategy at State Street Global Markets. “That’s where the currency’s vulnerability lies.”
Despite the recent selloff, the pound remains the best-performing G10 currency this year, up around 3% against both the dollar and the euro. Some analysts remain cautious, questioning whether Bailey’s comments represent a definitive dovish shift by the BoE.
Meanwhile, the European Central Bank (ECB) is also expected to ease its policy later this month in response to weakening business sentiment and declining inflationary pressures. The ECB has already cut rates twice this year, and markets are anticipating an additional 170 basis points of easing through the end of 2025, which could bring the deposit rate below 2%.
