The British pound weakened against both the euro and the U.S. dollar on Monday, as geopolitical tensions and uncertainty around central bank monetary policies remained in the spotlight.
Sterling experienced its largest daily drop since April last week, following comments from Bank of England (BoE) Governor Andrew Bailey, who hinted at a more aggressive approach to cutting borrowing costs. Analysts noted that Bailey's remarks led to a significant unwinding of long positions on the pound, making the currency more sensitive to shifts in market sentiment.
Meanwhile, the U.S. dollar slipped slightly after a rally driven by stronger-than-expected U.S. jobs data and escalating conflict in the Middle East.
Sterling fell 0.2% to $1.3090 on Monday, after hitting $1.3066 on Friday, its lowest level since mid-September.
In the UK, a survey showed signs of a cooling jobs market in September, which could provide reassurance to the BoE as it weighs further interest rate cuts. While this week’s UK economic data calendar is relatively light, key releases, including employment data and a consumer price index report, are expected next week.
The euro also gained against the pound, rising 0.28% to 83.81 pence per euro, despite halving some of its post-Bailey gains from Friday.
"Sterling could face volatility against the U.S. dollar due to uncertainty around the timing of rate cuts, though this is likely a short-term issue," said Dean Turner, Chief Economist for the Eurozone and UK at UBS Global Wealth Management. He added that dollar weakness could reassert itself over time as U.S. interest rates fall, reducing the currency's yield advantage.
In the short term, sterling's outlook remains uncertain, as geopolitical risks are expected to weigh on the currency, which is viewed as riskier compared to the safe-haven dollar.
Previously, investors anticipated that the BoE would reduce rates more slowly than the U.S. Federal Reserve and the European Central Bank. However, Bailey's recent comments and strong U.S. jobs data have prompted a reassessment of that view.
While many economists believe Bailey's stance reflects the majority of the BoE's Monetary Policy Committee, others point out that his dovish comments contrast with recent statements from Chief Economist Huw Pill and rate setter Catherine Mann. Photo by Abxbay, Wikimedia commons.