The value of the pound dropped sharply on Thursday following comments from Andrew Bailey, governor of the Bank of England, indicating that interest rate cuts could become more aggressive than previously anticipated.
Sterling sank as much as 0.9% to dip below $1.32, hitting its lowest level in two weeks, after Bailey suggested that policymakers might adopt a more “activist” approach to reducing borrowing costs.
The pound slid to $1.316 after his remarks, which were made in an interview with the Guardian. His comments come amid inflation running at 2.2%, slightly above the Bank of England’s 2% target.
Traders have priced in a quarter-percentage-point rate cut in November, which would see the Bank lower its base rate from 5% to 4.75%. The market’s reaction reflects a shift from Bailey’s earlier stance, where he had suggested that rate cuts would be “gradual,” driving sterling to a recent high of $1.343.
Today’s fall means the pound has lost all its gains against the dollar over the last two weeks, since the US Federal Reserve slashed its lending rate by half of a percent.
Valentin Marinov, head of G10 FX strategy at Credit Agricole, warned that the pound’s rally may be nearing its end.
“The comments could erode the rate appeal of the pound, which has easily been its main support,” Marinov said. “The best days of the pound rally may be behind us. We further note that the pound is still looking overbought and slightly expensive versus the dollar and the euro.”
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The pound’s recent strength had been largely attributed to expectations that the Bank of England would maintain a measured pace in reducing interest rates. However, with the potential for a more aggressive monetary easing cycle, market sentiment has shifted, reflecting growing uncertainty over the path of UK interest rates.
Against the euro, the pound (GBPEUR=X) was also lower, trading at €1.1926 at the time of writing.
Gold prices retreated on Thursday, following a brief spike driven by escalating conflicts in the Middle East, as investors shifted their attention to upcoming US economic data.
Spot gold had fallen 0.5% to $2,647 per ounce, roughly $35 below its all-time high reached in late September. US gold futures dropped 0.1%, to $2,670 per ounce.
The retreat came after bullion surged 1.1% in the previous session, following news of an Iranian missile strike against Israel, which revived demand for safe-haven assets amid growing geopolitical uncertainty.
“Geopolitical headlines often trigger immediate market reactions, but these tend to reverse if no significant assets are impacted,” said Charu Chanana, a strategist at Saxo Capital Markets.
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Chanana noted that gold remains an attractive hedge for investors, but cautioned that the next market move could depend on the risk of further escalation in the region, particularly if Iran’s oil assets come under threat.
Gold has seen a rally this year, rising nearly 30% and reaching a series of record highs. The recent gains have been fuelled by expectations of monetary easing from the Federal Reserve, which last month began a rate-cutting cycle.
Oil prices continued to rise on Thursday as Iran’s missile attack on Israel fuelled concerns about a broader conflict in the Middle East, raising fears of supply disruptions in a region critical to global oil production.
Brent crude futures rose 1.2% to $74.80 a barrel, while US West Texas Intermediate (CL=F) crude climbed 1.4% to $71.07 per barrel during early European trading. These gains come on the back of a nearly 9% rise since oil traded below $70 before Tuesday’s attack, sparking renewed concerns about inflationary pressures.
Analysts warn that oil could breach $80 a barrel. Fawad Razaqzada, market analyst at City Index, noted that “crude oil could rise $5 in the next few days if we see further escalation” of the conflict.
The oil market has been riveted by the latest flare-up in the Middle East, which follows a year of rising tensions as Israel confronts Iran and its proxies in Gaza, Lebanon, and Yemen. The region accounts for about a third of the world’s oil supply, and traders are growing increasingly anxious that the conflict could disrupt flows if energy facilities are targeted or key supply routes are blocked.
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Citigroup analysts highlighted the potential impact of a major Israeli strike on Iran’s oil infrastructure, which could remove as much as 1.5 million barrels per day from global supply. A smaller-scale attack on downstream assets could reduce output by 300,000 to 450,000 barrels per day, further tightening the market.
David Oxley, chief climate and commodities economist at Capital Economics, said: “Until the geopolitical situation in the Middle East de-escalates, oil prices will clearly remain at risk of spiking higher.”
Meanwhile, the FTSE 100 (^FTSE) was muted at the open. For more details check our live coverage here.
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