• The British pound fell more than 1% against the U.S. dollar Thursday, after Bank of England Governor Andrew Bailey told the Guardian newspaper that more good news on inflation could allow the central bank to be "a bit more activist" in its approach to rate cuts.
• The BOE held rates at 5% in September after cutting by 25 basis points in August, flagging concerns over high services inflation.
• Bailey also told the Guardian he was encouraged that cost of living pressures had not been as persistent as previously thought.

The British pound tumbled more than 1% against the euro and the U.S. dollar on Thursday after Bank of England Governor Andrew Bailey suggested more positive inflation data could lead the central bank toward a more aggressive approach to interest rate cuts.

Sterling was down 1.15% to $1.3114 at 11:50 a.m. in London, brushing its lowest intraday level since Sept. 12.

Bailey told the Guardian newspaper in an interview published on Thursday that the BOE could become "a bit more activist" in its approach to rate cuts if inflation developments continued to be good.

He also said he was encouraged that cost of living pressures had not been as persistent as previously thought, according to the Guardian.

The U.K. currency was buoyed following the BOE's monetary policy meeting on Sept. 19, as British policymakers struck a more hawkish tone than those at the U.S. Federal Reserve and European Central Bank. Sterling also found support over the summer from the decisive victory of the Labour party in the early July general election, with investors eyeing a period of political stability and the potential for pro-business reforms.

The upcoming budget, due to be announced at the end of October, has already caused some to question whether optimism around U.K. assets can hold, with political leaders repeatedly suggesting that tax hikes and public spending discipline will be required to meet a budget shortfall.

The pound meanwhile dropped 1.1%. against the euro Thursday, trading at its lowest level since Sept. 20.

That came despite several analysts hiking their outlooks for the pace of European Central Bank rate cuts this year, after euro zone and German inflation prints both came in below 2% this week.

Bank of America Global Research and Moody's Analytics were among the teams to say they now expected a 25 basis point rate cut from the ECB at its upcoming October meeting, along with a follow-up trim at its next and final gathering of the year in December. BOA Global Research said it now saw the ECB's deposit rate at 2% by June 2025, a quarter earlier than its previous forecast.

"The pound is sharply underperforming following a surprisingly dovish tone by Bank of England Governor Andrew Bailey in a newspaper interview overnight," Francesco Pesole, FX strategist at ING, said in a Thursday note. The "pound correction" may extend to the 1.3 mark in the near term as a "probably long-due dovish repricing" meets higher U.S. dollar swap rates, he added.

Inflation risks

Jane Foley, senior FX strategist at Rabobank London, said in a Thursday note that Bailey's recent comments on the potential for more aggressive rate cuts had "deeply shaken" support for sterling — but noted that the interview also featured the governor discussing potential risks to the inflationary outlook from a spike in crude oil prices, following the latest flare in Middle East tensions.

Bailey told the Guardian: "Geopolitical concerns are very serious... There are obviously stresses and the real issue then is how they might interact with some still quite stretched markets in places."

The central bank was helped by not having to deal with major oil price hikes, but it was watching the situation "extremely closely" for potential impacts, Bailey said.

"My sense from all the conversations I have with counterparts in the region, is that there is, for the moment, a strong commitment to keep the market stable," he continued.

Rabobank's Foley said Thursday: "While the market clearly latched onto the [rate cut] part of [Bailey's] statement, the inflation risks will remain key. Even when the potential impact of a Middle Eastern escalation is overlooked, U.K. inflation risks still suggest that the BoE could be slower to cut rates than several of its peers."

The Bank of England held its key rate in September, after cutting it by 25 basis points in August to 5%. During the September meeting, the institution expressed concerns about services inflation and the labor market, despite headline inflation hovering near its 2% target.

Money market pricing on Thursday morning suggested a high probability of two more 25-basis-point cuts from the BOE this year.