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Sterling set for biggest 6-month drop since 2016

Sterling holds near day's high after Johnson quits as PM
Sterling holds near day's high after Johnson quits as PM Copyright Thomson Reuters 2022
Copyright Thomson Reuters 2022
By Reuters
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By Danilo Masoni

- Sterling fell against it major peers on Wednesday with dovish comments by a new policymaker keeping the currency firmly on course for its biggest six-month drop against the dollar since 2016, the year of the Brexit referendum.

Swati Dhingra, who is due to join the BoE in August, said the bank should move very gradually to tighten monetary policy because there were signs that an economic slowdown was much more imminent than previously thought.

Sterling has been one of this year's worst performing major currencies, down more than 10% against the dollar, because of worries a severe economic slowdown, red-hot inflation and growing Brexit-related political uncertainty.

"The pound continues to be sold as worries about a sharp economic slowdown outweigh risks of runaway inflation. This has given rise to expectations that the BoE will front load rate hikes, before stopping and potentially reversing the rate increases," said City Index analyst Fawad Razaqzada.

"In fact, the BoE's incoming policymaker Swati Dhingra has gone one step further by saying that the central bank will need to tighten its belt very gradually going forward," he added.

By 1443 GMT, the pound had fallen 0.46% to $1.2127, its lowest level since June 16, when the BoE raised its key policy rate by another 25 basis points to 1.25% even as it warned that Britain's economy would shrink in second quarter.

Against the euro, the pound was 0.07% lower at 86.42 pence after hitting a two-week low.

In a separate speech on Wednesday, BoE Governor Andrew Bailey said the bank had other options beyond being ready to act "forcefully" if needed to tackle inflation.

Their comments highlight BoE's difficult task of taming price pressures, which surged to a 40-year high of 9.1% in May, without further damaging the economy through policy tightening.

Money markets fully price in a 25 basis point BoE rate hike for August and give a 72% chance of a 50 bps move.

Political risk is also on the rise due to tensions with Northern Ireland and after Scottish First Minister Nicola Sturgeon on Tuesday proposed another independence referendum for October 2023.

Johnson and his Conservative Party strongly oppose a referendum, saying the issue was settled in 2014 when Scots voted against independence by 55% to 45%.

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