Bank of England Governor unexpectedly "dovish", British pound plunges 1% to a 2-week low

Bank of England Governor "dovish", market increases bets on UK rate cut, pound falls to two-week low.

On Thursday, October 3rd, Bank of England Governor Bailey stated in an interview with The Guardian that the Bank of England was previously concerned about the persistent pressure on living costs, but it seems that this is not the case now, which is encouraging. If the news on inflation continues to improve, then he will see more aggressive rate cut opportunities.

Market participants have increased their bets on a rate cut by the Bank of England. Currently, the money market expects the Bank of England to cut rates by 25 basis points in November, with a 70% probability of further cuts in December. At the same time, the market has raised expectations for the magnitude of rate cuts by the Bank of England in 2025, with interest rates expected to reach around 3.25% by the end of next year.

Previously, despite increased expectations for rate cuts in the UK and the US, traders were reluctant to increase bets on a rate cut by the Bank of England, as UK policymakers emphasized a gradual easing of policy. Yesterday, the market only expected a 40% probability of a rate cut in December.

Following the announcement, the pound fell to a two-week low, with the pound against the dollar dropping over 1% to 1.3127. UK government bonds rose, with the yield on two-year bonds falling by 4 basis points to 3.98%.

On October 2nd, yesterday, US private sector employment data showed a rebound in US business hiring in September, boosting the attractiveness of the US dollar, and sentiment in the pound's options market reached its most pessimistic level since mid-August. Valentin Marinov, currency strategist at Credit Agricole CIB, stated:

"Bailey's comments may weaken the attractiveness of pound rates, which has always been a key support for the pound. The best time for the pound to rebound may have passed. We also note that the pound still appears somewhat expensive relative to the dollar and euro, seeming overvalued."

Later this month, the European Central Bank is also expected to cut rates due to deteriorating business activity, easing price pressures, and dovish signals from the Federal Reserve