The pound is coming under pressure as expectations grow the Bank of England will deliver just one more quarter-point increase this cycle.
(Bloomberg) — The pound is coming under pressure as expectations grow the Bank of England will deliver just one more quarter-point increase this cycle.
Sterling fell to the lowest level since June on Thursday, extending the biggest decline across the Group-of-10 currencies this month. Traders are paring bets on how much higher BOE rates stand to go and are no longer fully pricing in two more quarter-point hikes.
The moves reflect optimism inflationary pressures are easing. A central bank survey showed UK firms expect to raise their prices at the slowest pace in almost two years, while BOE Governor Andrew Bailey on Wednesday said he predicted a further “marked” drop in price pressures this year.
“The UK rates markets continue to reassess their BOE outlook,” said Credit Agricole’s Head of G10 FX strategy Valentin Marinov. “The pound will continue to follow the UK rates and further erosion of its rate appeal could result in further losses,” he added.
Swaps pricing implies a peak rate of around 5.70%, the lowest since June. The bank’s next rate decision is due on Sep. 21.
The pound traded 0.4% weaker at $1.2463 as of 12:35 p.m. in London. Gilts jumped, outperforming other bond markets, with two-year yields dropping 9 basis points to 5.15%. The yield on the equivalent German note was down just 3 basis points, to 3.09%.
“Market pricing is now much closer to our view of the outlook for Bank policy,” said Cathal Kennedy, senior UK economist at RBC Capital Markets. RBC expects one more quarter-point hike later this month, taking the rate to a final 5.50%.
Bank of England Governor Signals Rate Hikes May Be Near an End
Kennedy noted that Bailey’s comments “are supported by the current trends in the data. The labour market is clearly loosening.”
Bailey, who was testifying to Parliament, also said that UK interest rates are probably “near the top of the cycle”, warning that much of the economic damage has yet to be felt.
Figures Thursday from two of Britain’s top mortgage lenders indicated that home prices are falling at the fastest pace since 2009, deepening a housing slump, as higher mortgage costs weigh heavily on buyers.
The pound’s weakness also reflects a broad rally in the greenback, which has been driven to a six-month high amid signs of US economic resilience. The Bloomberg dollar index is on track for an eighth consecutive week of gains.
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