Sterling falls against euro and dollar

Recent policy updates from the BoE kept downward pressure on sterling as the BoE's last monetary policy meeting signalled more caution over plans for further policy tightening

Sterling fell against the euro and the dollar on Monday, with investors focusing on the Bank of England's next moves to tame inflation while avoiding recession risks. Recent policy updates from the BoE kept downward pressure on sterling as the BoE's last monetary policy meeting signalled more caution over plans for further policy tightening.

The pound fell 0.3% to 83.60 pence per euro. EUR/GBP may not weaken much more below the 0.8300 mark, ING analysts said in a note to clients.

Sterling also lost ground against a strengthening dollar as 10-year yields above 2.5% at a three-year high boosted the greenback to a two-week high. By 1121 GMT sterling was down 0.3% to $1.3138, not far from its lowest since November 2020 of $1.3 it hit on March 15.

Cable may well extend its current downtrend towards the key 1.3000 support, ING analysts added. Bank of England Governor Andrew Bailey will give a speech on Monday; Deputy Governor Ben Broadbent will speak on Wednesday.

We will be paying close attention to any clues around how the Monetary Policy Committee may balance the need to bring inflation down to its 2% target against avoiding an economic downturn, Deutsche Bank analysts said in their weekly note. But from now on, the market reaction might not follow the usual path in which the pound strengthens when rates rise.

This is the second consecutive meeting where the BoE has hiked rates with a tinge of regret and goes to heart of why we think UK rate hikes may not necessarily be constructive for the pound, BofA analysts said in a research note. The BoE raised interest rates on March 17 but it softened its language on the need for more increases.

Simply put, the Bank of England is hiking for the wrong reasons and sounding defensive whilst the Fed is hiking for the right reasons and sounding increasingly hawkish, they added. BofA's proprietary BoE Mood Indicator recently rose to its most hawkish reading on record.