Sterling tumbled to its lowest level in three weeks after Bank of England Governor Andrew Bailey signaled the potential for swifter interest rate cuts if labor market conditions worsen. The pound fell sharply to $1.3467 before recovering slightly by day’s end.
Bailey’s assessment cited rising slack in the economy and blamed increased taxes on employers for the slowdown. While the BoE has previously favored a measured approach, Bailey’s remarks reinforced expectations that rates, currently at 4.25%, will continue to fall after a year of steady reductions.
Recent GDP data showing contractions in April and May have stoked concerns about the UK’s economic outlook. A KPMG analysis highlighted the steepest drop in business hiring activity in nearly two years, fueling fears of a deteriorating labor market.
Market sentiment shifted rapidly, with an 85% chance of an August rate cut now priced in, up from 76% last week. The government faces growing challenges amid persistent inflation and declining living standards.
