Sterling continues to decline following Bailey's speech
Sterling continues to decline following Bailey's speech

GLOBAL MARKETS: After Bank of England Governor Andrew Bailey reaffirmed that he expected pricing pressures to lessen, maybe as soon as April, the pound fell versus a rising dollar on Wednesday and continued to lose ground.

Speaking at the British Chambers of Commerce Global Annual Conference, Bailey indicated that more tightening of policy may be needed if pricing pressures were to be more persistent, but noted that there were indications the labour market was relaxing slightly. Data released on Tuesday revealed that while the rate of increase in total pay, including bonuses, remained unchanged, the unemployment rate in Britain increased to 3.9%. This led some investors to reduce their bets on future interest rate increases.

"We took a dovish view from what the Bank of England was telling us last week, and thankfully the (labour market) data has confirmed that," said Simon Harvey, head of FX analysis at Monex Europe. He said, "We do not think that the improvement is so great that you're going to see sterling continue to outperform, even though we think that conditions in the UK economy are a bit more favourable towards capital inflows.

After hitting a three-week low of $1.2422 earlier in the day, the pound was last down 0.3% at $1.2440. The exchange rate of the pound to the euro was 87.01 pence.

Markets are divided on the BoE's next step despite the fact that rates have increased by a total of 400 basis points since the central bank started tightening policy in late 2021. According to Refinitiv data, traders anticipate a 25 basis point increase at the June meeting with a roughly two in three likelihood that they will keep steady.

Future data strength will be crucial, with the April inflation reading due next week serving as a major indicator. The pound has recently been supported by CitiFX's economic surprise index for the UK, which is maintaining close to its highest level in over two years and suggests data is more positive than expected.

However, this also means that the threshold for potential positive surprises has been raised, which analysts suggested might make the pound vulnerable if statistics begin to surprise on the negative side.

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