Pedro Goncalves writes:
Sterling is on track for its steepest weekly loss since July 2023, having fallen roughly 1.7% against the US dollar. The pound has dropped by 2.2 cents since the start of the week, reaching around $1.3146 at the time of writing. If this trend continues, sterling could slide to levels not seen since February 2023.
The currency’s decline has been driven by a combination of global investors seeking safe-haven assets and mounting expectations of more aggressive interest rate cuts by the Bank of England (BoE). Analysts are increasingly anticipating that the Bank will cut rates faster than previously forecast, a shift spurred by recent comments from governor Andrew Bailey.
Bailey indicated the central bank might adopt a “bit more aggressive” and “activist” stance in reducing rates as inflation pressures ease. This shift in tone has weighed on the pound, as markets recalibrate expectations for UK monetary policy.
Meanwhile, the US dollar has strengthened, bolstered by its status as a safe haven amid the ongoing conflict in the Middle East.
“We’ve always thought that once the BoE became more comfortable with the path of inflation, it would signal a more aggressive rate-cutting cycle. Bailey’s comments are a clear move in that direction,” said Nick Andrews, senior FX strategist at HSBC.
Capital Economics suggested that the pound’s sharp fall reflects a broader correction, with sterling likely unwinding from a period of overvaluation. Despite this, the pound opened Friday slightly higher on hopes that a speech later in the day by BoE chief economist Huw Pill might offer a counterpoint to Bailey’s more dovish tone, potentially providing a boost for the currency.