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Pound Sterling Today: Eyes on Bailey as GBP Struggles against Euro and Dollar

- Bailey to deliver Mansion House speech
- Comes amidst GBP weakness
- A positive tone could help GBP higher
- Haldane fires warning shots over inflation

Andrew Bailey

Above: File image of Andrew Bailey, copyright: Bank of England, Pound Sterling Live.

  • Market rates at publication: GBP/EUR: 1.1660 | GBP/USD: 1.3810
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The British Pound could take some near-term guidance from an appearance of the Governor of the Bank of England who is to deliver a speech at London's Mansion House.

The speech is tipped by some foreign exchange analysts to touch on the outlook for UK monetary policy and could provide markets with some guidance as to whether the Bank is considering bringing forward the timing of the first interest rate rise.

Such a hint would potentially aid the British Pound higher and provide some better exchange rates for those looking to sell Sterling and buy Euros, Dollars and other currencies following a period of underperformance for the UK currency.

"The pound might recoup some of its recent losses against the U.S. dollar if Bailey delivers a hawkish speech, or fall further if his comments are more dovish than expected," says Robert Howard, a Reuters market analyst.

Recent price action in the Pound against the Dollar and Euro

The speech comes just days after the Bank delivered its June policy decision which appeared to have disappointed market participants and triggered a move lower in key Pound exchange rates.

"After seeing Sterling compromised in the wake of the BoE maintaining its forward guidance, the focus week remains on the BoE and the keynote speech by the Governor at the Mansion House on Thursday," says Howard.

The Pound-to-Euro exchange rate fell back from levels above 1.17 in the wake of the June policy update and is seen hovering above 1.16, a disappointing appearance by Bailey could trigger a move to lows last seen in mid-June.

The Pound-to-Dollar exchange rate (GBP/USD) meanwhile continues to push lower with a rate of 1.3810 being recorded at the time of writing; it was in early June that the pair was seen as high as 1.4250.

GBP/USD fell in June after the Federal Reserve signalled to markets that it was looking to bring forward the timing of its first rate hike to 2023, a shift that saw U.S. bond yields rise and the Dollar follow suit.

"The UK pound’s more than 2% decline in June had it on course for its worst month of the year against the greenback and its weakest performance since September 2020. The dollar stepped on the accelerator on the prevailing view that the Fed would dial back on stimulus before the Bank of England," says Joe Manimbo, Senior Analyst at Western Union Business Solutions.

For the Pound to resist the Dollar and make gains against other currencies the Bank would need to bring forward its own guidance on the next rate rise.

"Should the Governor validate a more constructive backdrop there is scope for May 2022 rate expectations to trend back higher. After seeing Sterling longs pared to near five month lows, suggests much cleaner positioning backdrop. This should allow scope for a GBP rebound should Bailey boost rate expectations," says Jeremy Stretch, Head of G10 FX Strategy at CIBC Capital Markets.

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Bailey will deliver his speech at 19:00 GMT.

Money market pricing show a first rate rise is expected at the Bank in 2022 and some analysts say it is unlikely these expectations can be brought forward any further given currently held expectation for UK economic growth.

"In order for sterling to rise further this year, it must become the conventional wisdom that the MPC will hike sooner and/or further than the U.S. Fed," says Samuel Tombs, UK Economist at Pantheon Macroeconomics. "Such a development seems highly unlikely".

Pantheon Macroeconomics say the Pound is likely to remain under pressure for the foreseeable future.

"We think sterling will trend lower against the dollar over the next year," adds Tombs. Pantheon Macroeconomics forecast the Pound-to-Dollar exchange rate to "ease to around $1.35 by the end of this year," says Tombs.


Above: Andy Haldane. File image © Bank of England.

Bailey's speech comes just hours after a speech delivered by the Bank's Chief Economist Andy Haldane, who said the UK economy was at risk of over heating and delivering persistently high inflation levels.

Haldane raised eyebrows in his final speech as an employee of the Bank by saying inflation was likely to rise to 4.0% over coming months, which is well ahead of the Bank's own in-house forecasts.

Haldane is a lone voice on the Bank's Monetary Policy Committee (MPC) in calling for a relatively prompt ending to the Bank's quantitative easing programme which sees it keep the cost of borrowing across the economy low by buying up government and corporate bonds.

Haldane was the only member of the nine-person MPC to call for a reduction to quantitative easing in the June meeting on the basis that the economy was already recovering strongly and the cheap money created by the Bank risked inflating activity.

"When resurgent, and probably persistent, demand bumps up against slowly-emerging, and possibly static, supply, the laws of economic gravity mean the prices of goods, services and assets tend to rise, at first in a localised and seemingly temporary fashion, but increasingly in a generalised and persistent fashion," says Haldane.

Haldane argues that unless quantitative easing is ended before long the Bank risks stoking higher inflation levels that become a permanent feature of the economic landscape.

"A slow exit risks putting central bank balance sheets on an unsustainable footing," says Haldane. "This is the most dangerous moment inflation-targeting has so far faced."

If Bailey tips his hat in Haldane's direction and mentions concerns about inflation becoming potentially entrenched the foreign exchange market might read this as a signal the Bank will move on quantitative easing and interest rates towards the start of 2022.

Such an outcome would be supportive of the Pound.