Sterling hovers near one-month low on rate cut bets

The pound was little changed on Monday, hovering near its lowest level in a month after investors last week ramped up their bets that the Bank of England will cut interest rates in June.

Sterling was flat at $1.2608, not far off Friday’s one-month low of $1.2576. The euro was little changed against the pound at 85.79 pence, down from Friday’s two-month high of 86.02 pence.

The pound dropped about 1 per cent against the dollar last week after the Bank of England held interest rates at 5.25 per cent on Thursday and Bailey said inflation is moving in the right direction for interest rate cuts.

Bailey caused the pound to fall further on Friday after he told the Financial Times that rate cuts are “in play” this year.

Traders now see a roughly 75 per cent chance the BoE cuts rates by June, up from about 35 per cent at the start of last week, according to money market pricing. Those bets have been encouraged by data showing inflation is falling faster than expected.

“Sterling is consolidating at slightly lower levels after the Bank of England’s dovish bout of communications late last week,” said Chris Turner, head of global markets at ING.

Turner said he thought the BoE’s message means the euro could rise to 87 pence over the coming month as the pound slips.

Meanwhile, US economic and inflation data has remained broadly stronger than expected, causing investors to reduce their expectations of a June cut from the Federal Reserve.

Expectations that interest rates might remain higher for longer in the US have boosted the appeal of American bonds and supported the dollar.

The dollar index, which tracks the currency against six peers, was last roughly flat on Monday at 104.38, after rising around 1 per cent last week.