Market Report - 03/10/2024
Dovish Bailey adds to Pound sell-off ; Safe haven Dollar strengthens
The Pound has taken a hit this morning, dropping 0.5% to a two-week low following comments made by the Bank of England Governor Andrew Bailey, in an interview with a high-profile newspaper in the UK. He claimed that the central bank could become a “bit more aggressive” in cutting interest rates; provided the news on inflation shows a continuous retracement.
The Governor said that he has been encouraged by the fact that cost of living pressures had not been as persistent as the Bank thought they might be and added, that if the news on inflation continued to be good there was a chance of the Bank becoming more “a bit more activist” in its approach to cutting interest rates, which currently stand at 5%.
Comments made this morning suggesting the BoE could be “activist” and “aggressive” do suggest there may have been a change in stance, following comments made back on 19th September, when the Bank left rates on hold at 5%, Bailey said “It’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”
Bloomberg’s Markets Today liveblog has spotted that Andrew Bailey’s comments are “rippling through bets on Bank of England rate cuts”. Investors are now more confident that the Bank will cut borrowing costs in coming months. Having wavered slightly so far this week, a 25 basis point cut in November is now being fully priced again. And bets are being added further down the horizon too, with 125 basis points now priced by June next year.
In the aftermath of this release, the Pound has been victim of a sharp sell-off, trading down against the Euro and the Dollar this morning. Versus the USD, the rate has seen a significant downturn from highs of 1.34 to currently trade around the 1.3150’s, whereas against the Euro there has been a sharp devaluation of the rate from 1.2015 to the low 1.19’s.
The Greenback has strengthened in the past 48 hours and has been benefitting from ‘safe haven flows’. Investors who are likely to feel nervous will try to protect their money, due to the Middle East crisis which has seemingly escalated in recent days. Often in times of geo-political unrest, there is strong demand for safe haven currencies such as the US Dollar and this seems to be the case again, at this point in time.
Despite this mornings fall, The Pound was already victim of a sell off before Bailey’s comments, as GBP/USD was down more than 1% so far this week following the tensions in Isreal and Iran. GBP/USD has found a strong level of support at $1.3170, however further downside could be likely if there is an increase in these tensions and suddenly $1.35 (which seemed like a real possibility on Monday) seems like a mountain to climb from here.
Next up on the agenda for the rest of this week, we have some key macro-economic data releases which are likely to cause further fluctuations to the currency markets in what has already been an incredibly volatile week:
Thursday 9am: EU PMI figures
Thursday 3pm: US ISM & PMI figures
Friday 9:30am: UK PMI figures (Construction)
Friday 1:30pm: US Non-Farm Payroll Report