British Pound Falls Against Euro And Dollar As BoE Bailey Pushes Back

The Pound Sterling weakened against both the US dollar and euro as Bank of England Governor Andrew Bailey pushed back against market expectations for aggressive rate hikes.

Markets came under renewed pressure on Thursday after President Trump struck a more aggressive tone on Iran, raising fears of further escalation.

Sterling was among the weaker performers, as Governor Bailey signalled that markets may be overestimating the likelihood of rate hikes.

While higher rates could help contain inflation, they risk causing significant damage to an already fragile UK economy.

Following a strong start to the week, risk sentiment deteriorated sharply.

Trump’s primetime address marked a shift from earlier conciliatory comments, unsettling investors.

He warned that without a settlement, the US could escalate strikes dramatically, targeting key Iranian infrastructure.

This escalation risk, combined with the approach of a long weekend, triggered a broad sell-off in risk assets.

The S&P 500 fell around 1.5%, while oil surged roughly 10% on fears of prolonged supply disruption.

Trump also downplayed the importance of securing the Strait of Hormuz, suggesting the US would not act as a global guarantor of energy flows.

This raised concerns that supply routes could remain restricted, particularly for Europe, keeping oil prices elevated and inflationary pressures high.

Sterling Under Pressure

Against this backdrop, the pound weakened as markets reassessed the outlook for UK interest rates.

Earlier expectations for multiple rate hikes have begun to look excessive.

Governor Andrew Bailey reinforced this view, stating that markets are “getting ahead of themselves” in pricing in further tightening.

His comments reflect growing concern that higher borrowing costs could damage confidence and economic activity.

As ING noted:

“[Bailey] emphasised that markets were ‘getting ahead of themselves’ in pricing a series of rate hikes this year… The BoE should fulfil its remit in a way that causes the least damage to the economy and the people.”

This marks a shift from the more hawkish tone seen immediately after the March policy meeting.

Central banks now appear to be attempting to temper market expectations.

Central Banks Recalibrate

Recent commentary from policymakers suggests a more cautious approach is emerging.

Earlier in the week, Federal Reserve Chair Jerome Powell struck a relatively dovish tone, indicating that rate cuts remain more likely than hikes over the medium term.

Similarly, the Bank of England appears reluctant to tighten policy aggressively in response to a supply-driven shock.

Higher interest rates cannot resolve rising oil prices and risk exacerbating the economic slowdown.

While they may help contain inflation, the trade-off in terms of growth could be severe.

For the UK, where growth is already weak and the labour market is cooling, aggressive tightening would carry significant risks.

As a result, Bailey’s comments have weighed on Sterling.

Markets now expect a pause in policy rather than a rapid tightening cycle.

However, with inflation risks still elevated, the Bank is unlikely to return to rate cuts any time soon.

This leaves the pound in a difficult position, caught between rising inflation and a weakening growth outlook.