Sterling Set for Biggest Drop in 6 Months Since 2016

On Wednesday, Sterling declined against most of its major peers, as a new policymaker made some dovish comments. This put the British currency on course for its biggest drop in six months against the US, which has not been seen since 2016 when the Brexit referendum had taken place.

The dovish stance

Swati Dhingra will be joining the Bank of England in August and she stated that the central bank should take a gradual approach when it comes to tightening monetary policy. The new policymaker stated that the signs of a slowdown in the economy had turned out to be a lot more imminent than assumed earlier.

As for the Sterling, it has had one of the worst years in terms of performance, as compared to some of the other major currencies. The British pound has lost almost 10% of its value against the US dollar due to soaring inflation, increasing concerns about an economic slowdown, and growing uncertainty over Brexit-related agreements.

Market analysts said that the British pound was dealing with a sell-off because the risks of high inflation had been outweighed by risks of a sharp economic downturn. There are expectations that the Bank of England will start with aggressive interest rate hikes before they decide to stop and then reverse the trend.

As a matter of fact, the incoming Swati Dhingra has already asserted that the central bank would need to tighten its belt slowly while moving forward.

The pound falls

There was a 0.46% decline in Sterling by 1443 GMT, which brought it to $1.2127. This is the lowest that the currency has gone since June 16th, when there had been a 25 basis point increase by the Bank of England in the interest rate, which raised it to 1.25%.

There had already been warnings of the British economy shrinking in the second quarter of the year. The pound fell 0.07% against the euro, which brought it to 86.42 pence after it reached a low of two weeks.

BoE governor speaks

Andrew Bailey, the governor of the Bank of England, stated that there were other options available to the bank for tackling inflation, which went beyond being ‘forceful’. The comments highlight the difficult challenge that the central bank is facing when it comes to cooling down price pressures.

Data shows that the UK inflation rose to 9.1% in May, which is the highest value in over 40 years, which means that the BoE has to stave off inflation without inflicting any damage on the economy via tightening monetary policy.

A rate hike of 25 basis points by the BoE in August has already been priced in by money markets and a rise of 50 basis points has a 72% chance. There are also political worries on the rise because of the Northern Ireland protocol. Plus, Tuesday saw the First Minister of Scotland, Nicola Sturgeon propose another referendum to be conducted in October 2023. A referendum has been strongly opposed by Prime Minister Boris Johnson and his Conservative party.