Sterling drops on Bailey remarks and shift to safe havens

Sterling was on track on Thursday for its biggest daily fall in almost two years versus the euro and in six months against the dollar as investors shifted to safe-haven assets and Bank of England Governor Andrew Bailey hinted at faster policy easing.

The BoE could become "a bit more activist" on rate cuts if there is further good news on inflation, Bailey said in an interview published on Thursday.

Sterling was last down 1.05 per cent at $1.3128, on course for its biggest daily fall since April.

The pound is seen as a risky currency that tends to rise along with equities.

Euro/sterling was up 1.05 per cent at 84.12 pence, in its biggest daily rise since December 2022.

"The market is running long GB pound in part based upon the BoE staying on hold whilst those around it continue to cut," said Neil Jones, senior foreign-exchange salesperson to financial institutions at TJM Europe.

"Bailey's comments shift this narrative sufficiently for investors to take chips off the table...," he added.

The safe-haven dollar rose to a one-month peak, as tensions simmered in the Middle East following Iran's ballistic missile attack on Israel.

UK 2-year gilt yields, sensitive to expectations on BoE policy, dropped 5.5 basis points (bps) to 3.96 per cent.

Interest rate futures showed financial markets see a 98 per cent chance of a 25-bp rate cut at the central bank's November meeting, up slightly from Wednesday. Markets are pricing in 41 bps of rate cuts by year-end from 36 bps on Wednesday.

Market participants will look to Friday's US jobs data, which could offer hints on the health of the world's biggest economy and shape the Fed's policy path.

The first budget plan from the new British government, due at the end of this month, is also in focus, with bond yields rising on Wednesday as investors weighed up the possibility of higher debt issuance.

George Buckley, Nomura's chief UK and euro area economist, upgraded forecasts for gilt issuance to 315 billion pounds ($413 billion) this year versus 277.7 billion previously expected.

"While both taxes and spending are likely to be higher across the forecast horizon, we think the balance will be towards a mild fiscal loosening on average," he said.

"If so, that would, at the margin, support our view of the Bank of England easing more gradually."