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On Thursday, the pound experienced a sharp decline following remarks by Bank of England Governor Andrew Bailey to The Guardian, indicating the central bank may adopt a more “aggressive” approach to rate cuts if inflation continues to ease. This triggered a 1.08% drop in the pound, closing at 1.3123 against the U.S. dollar, marked its steepest daily loss in six months. 

(GBPUSD Daily Price Chart, Source: Trading View) 

Bailey expressed optimism over the easing cost-of-living pressures but cautioned that the Bank is closely monitoring developments in the Middle East, given the potential risk of an oil price spike. Markets interpreted Bailey’s statements as an endorsement to further price in rate cuts. Despite the pound’s significant sell-off earlier this week, further downside may be constrained in the short term, although Bailey’s comments have created additional hurdles for its recovery. 

Inflation currently sits at 2.2%, marginally above the Bank’s 2% target. However, investors remain wary of escalating geopolitical tensions in the Middle East, which could push oil prices toward $100 per barrel in the event of a wider conflict involving Israel and Iran – a scenario that could rekindle inflationary pressures. 

The Bank of England executed its first rate cut since the pandemic in August, lowering the base rate from 5.25% to 5%. While rates remained steady in September, Bailey hinted that further cuts could be on the table if inflationary trends persist downward. Most investors now anticipate a quarter-point cut to 4.75% at the Bank’s next policy meeting in November, with markets fully pricing in this expectation after Bailey’s recent comments. 

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