Sterling Shaky Ahead of BoE Decision

The British pound dropped to its lowest in two weeks amid anticipation of the Bank of England's interest rate decision and a key speech by Finance Minister Rachel Reeves. Investors' growing expectations of a BoE rate cut have pressured the pound and pulled bond yields lower.

The British pound dropped to its lowest level in two weeks on Monday as investors eagerly awaited both the Bank of England's interest rate decision on Thursday and a crucial speech by British Finance Minister Rachel Reeves later in the day.

Sterling declined 0.25%, hitting $1.2834 after falling to $1.2807 earlier in the session, its lowest since July 10. Meanwhile, the euro gained against the pound, rising 0.11% to 84.46 pence, marking a two-week high.

According to derivative market pricing, traders have ramped up their bets on BoE rate cuts, pricing in almost a 60% chance of a reduction on Thursday, up from just over 50% late on Friday. This shift in rate expectations has led to a drop in British bond yields, adding pressure on the pound.

FX strategist Francesco Pesole of lender ING noted, "The pricing of the Bank of England rate cut continues to creep higher." He highlighted that the forex market is catching up with the bond markets but warned that the pound's advantage could be "cut quite substantially" if borrowing costs are reduced.

Investors were also keenly awaiting Chancellor Rachel Reeves' speech, where she is expected to accuse the former Conservative government of creating a £20 billion ($26 billion) shortfall in public finances. Neil Jones, a senior FX salesperson at TJM Europe, mentioned that sterling's fall reflected investor nerves regarding Reeves' anticipated announcements.

Moreover, political uncertainty has clouded many investors' views on the upcoming BoE decision. Key policymakers have refrained from public statements for more than two months due to pre-election rules.

Though British inflation has retreated to the BoE's 2% target, rising services prices and wages are causing some officials to advocate for holding interest rates at 5.25% for an extended period.

(With inputs from agencies.)