Pound Sterling Pressured by Bailey's Dovish Comments

Above: File image of Andrew Bailey. Edited from original @ Association of British Insurers, reproduced under Creative Commons Licensing.

Pound Sterling failed to capitalise on the above-consensus midweek inflation figures thanks to comments made by Bank of England Governor Andrew Bailey, who signalled he is intent on cutting interest rates soon.

Wednesday's inflation data release showed UK inflation printed at stronger-than-expected levels in March, but Bailey sounded dismissive of the numbers.

"Next month's inflation number will show quite a strong drop," he said in an appearance alongside other central bankers in Washington. He added that the "latest UK inflation fall matches Bank of England expectations".

The market has interpreted Bailey's response as a sign the central banker is intent on cutting interest rates in June.

Ahead of his comments, markets had significantly lowered the quantum of rate cuts expected from the Bank of England in 2024 following 1) the sharp reduction in Federal Reserve rate cut expectations, 2) Tuesday's strong wage data and 3) Wednesday's above-consensus inflation print.

But Bailey appears content with the idea that the Bank can cut rates without stoking inflation. This sets up a potential scenario where UK rates potentially come down faster than they do in the U.S. and perhaps even the Eurozone.

Such divergence will weigh on the Pound.

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The Pound to Euro exchange rate reflected this fear, dropping 0.28% on the day to go back below 1.17 and quote near 1.1670 at the time of writing. The Pound to Dollar exchange rate is firmer near 1.2464, but this owes itself more to a broadly softer USD.

"There is room for further GBP weakness should markets start pricing in an earlier rate cut by the BoE," says Thanim Islam, Head of FX Analysis at Equals Money. "Governor Bailey added to GBP woes with some dovish comments, suggesting that the job market is loosening as well as expecting a large drop in inflation next month. He also attempted to differentiate the UK from the US by stating that the UK faces less inflation risk than the US."

Lindsay James, investment strategist at Quilter Investors, described Bailey's comments as "reassuring" given he sees the inflation path is "pretty much on track".

"The stage may soon be set for the Bank of England and the ECB to consider rate cuts ahead of the Federal Reserve," says James.

“While this development could have implications for sterling, UK investors allocating funds to overseas assets would generally benefit from a decline in sterling relative to international currencies. However, travellers to the US may find their holidays becoming even more expensive due to the currency exchange rate," he adds.