Market News

BY  Alice Gledhill, Bloomberg News

, Bloomberg

(Bloomberg) -- The pound fell to a two-week low as the Bank of England validated market bets that a first interest-rate cut can come as soon as next month. 

The currency dropped as much as 0.4% to $1.2446, notching up a third straight day of losses, after the UK central bank revealed two policymakers voted to lower borrowing costs at Thursday’s meeting. The BOE held rates at a 16-year high, as expected.

Money markets moved to price in a higher chance of the BOE delivering three quarter-point rate cuts this year after the decision, with a 50% chance of the first move coming in June. Swaps are now pricing two quarter-point cuts in full and a 34% chance of a third, from 16% prior the policy announcement. 

The pound’s decline reflects “the slight dovish tilt” from the BOE, said Brad Bechtel, global head of FX at Jefferies. “We remain short for now, tactically, although we may cover if we get a further down move after the press conference.”

The move highlights the headwinds for the pound with the BOE much closer to easing than the Federal Reserve, which is contending with a resilient economy and sticky inflation. The currency lost some of its luster on dovish comments from UK officials including Governor Andrew Bailey since the March meeting, which stoked speculation that the central bank could begin teeing up a cut in either June or August.

In Thursday’s decision, BOE’s Deputy Governor Dave Ramsden joined external member Swati Dhingra in calling for an immediate cut, while the other seven members of the Monetary Policy Committee preferred no change.

Bailey said at a press conference after the decision that the rate will likely have to be cut in coming months, and that a change as soon as June “is neither ruled out nor a fait accompli.” That sent the UK two-year yield to the day’s low, down as much as four basis points to 4.27%.

--With assistance from Greg Ritchie.