GBP/USD falls to 10-week low despite BoE’s hawkish intervention

Bank of England governor Andrew Bailey recognises “strengthened” case for rate rise

UK one pound coins lined up and covering a surface                                 
The pound fell to a 10-week low against the dollar following rising US Treasury yields – Photo: Shutterstock
                                

The pound fell to a 10-week low against the dollar on Tuesday as rising US yields eclipsed the governor of the Bank of England’s (BoE’s) recent comments. 

At 14:00 BST, sterling traded down by 1.2% against the dollar at $1.3536. This came after the two-year US Treasury yield jumped to an 18-month high of 0.317% and the 10-year yield hit a three-month high of 1.548%, up by 22 basis points in five days. 

Indeed, the US Dollar Index (DXY), which tracks the dollar against a basket of other leading currencies, rose to a new 2021 high of 93.74.

Bailey’s latest speech

The pound’s latest drop came despite relatively hawkish comments by Britain’s foremost central banker, Andrew Bailey. 

Speaking to the Society of Professional Economists in London, the BoE governor said: “All of us believe that there will need to be some modest tightening of policy to be consistent with meeting the inflation target sustainably over the medium term.

“Recent evidence appears to have strengthened that case, but there remain substantial uncertainties and we are monitoring the situation closely.” 

Having consistently argued that inflation above the bank’s 2% target would not climb much higher and prove to be transitory, the BoE last month revised its forecast, stating that inflation would rise to 4% by the end of the year.

Rate rise over tapering QE

Seemingly vindicating the warning made earlier this year by since-departed chief economist Andy Haldane, Bailey admitted “inflation is likely to rise slightly above 4%”.

Bailey repeated his view that current “price pressures will be transient”, before adding: “For all the noise about QE [quantitative easing], the key thing for me is that it has thereby contributed to keeping stable the cost of finance for companies during the Covid period, and that has been very important, both for monetary and financial stability.”

In light of his continued favourable attitude towards the QE strategy, which some have criticised as essentially constituting a form of money printing, Bailey stated: “It follows that the monetary policy response, if we need to make one, to the inflation pressure should involve Bank Rate not QE. There is no reason to beat about the bush on this point.” 

Further reading: Tech stocks retreat on rising Treasury yields 

Further reading: Oil passes $80 per barrel

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