Sterling plumbs two-month low in wake of BoE governor's comments

Sterling hit fresh two-month lows against the dollar on Friday, pressured in the wake of dovish comments from the Bank of England's governor. In his annual Mansion House speech on Thursday, Andrew Bailey said it was important to ensure that the recovery was not undermined by a premature tightening in monetary conditions, as a rise in inflation was likely to be temporary.

Sterling hit fresh two-month lows against the dollar on Friday, pressured in the wake of dovish comments from the Bank of England's governor.

In his annual Mansion House speech on Thursday, Andrew Bailey said it was important to ensure that the recovery was not undermined by a premature tightening in monetary conditions, as a rise in inflation was likely to be temporary. Bailey's comments knocked the pound to its lowest since April 16, and the currency hit a fresh low of $1.3745 in morning deals in London.

Against the euro, it recovered some ground to trade 0.2% higher at 85.94 pence. "The pound's recent bout of out-performance faltered yesterday as BoE Governor Bailey said that the BoE should not over-react to the inflation spike," said ING in a note to clients. "Sterling looks a little vulnerable to a further BoE re-pricing short term and euro-sterling could see a decent rally if resistance break at 0.86.10-15 pence."

ING noted that, unlike U.S. interest rate futures markets, sterling markets are in the process of handing back hawkish pricing seen in late June. Money markets were earlier pricing a 10 basis point BoE rate hike in May 2022.

Sterling was one of the worst-performing G-10 currencies last week after the BoE kept the size of its stimulus program unchanged and said inflation would surpass 3%, but that the climb further above its 2% target would be only temporary. The pound found some support against the euro this week on the European Union decision to extend by three months an exemption on customs checks on chilled meat shipments to Northern Ireland.