Sterling gives up two-week high before Bailey's testimony

The British pound declined at the opening of the European market on Tuesday against a basket of global currencies, giving up a two-week high against the US dollar due to active profit-taking and investor caution ahead of the Bank of England Governor's testimony.

Andrew Bailey is scheduled to testify on the Financial Stability Report before the Treasury Committee in London, and his comments are expected to provide stronger evidence regarding the path of interest rates in the United Kingdom for the remainder of this year.

The Price

• GBP/USD today: The pound fell against the dollar by 0.1% to $1.3474, from the opening level of $1.3488, after recording a high of $1.3494.

• On Monday, the pound rose by 0.6% against the dollar and hit a two-week high of $1.3511, benefiting from the decline in the US currency following less aggressive comments by a key Federal Reserve official.

UK interest rate

• Following UK labor market data released late last week, traders increased their bets on the Bank of England easing interest rates, now expecting at least an additional 50 basis points in cuts this year.

• Market pricing for a 25-basis-point rate cut by the Bank of England at the August meeting rose from 65% to 85%.

Andrew Bailey

At 10:15 GMT, Bank of England Governor Andrew Bailey is set to testify on the Financial Stability Report before the Treasury Select Committee in London.

Bailey told The Times last week that the direction of interest rates is “definitely down.” In the interview, he gave a strong signal that the Bank would accelerate rate cuts if more signs of “slack” emerge in the economy.

The term “slack” refers to a scenario in which the economy is not operating at full capacity, with higher unemployment and slowing output. This is considered disinflationary and would bolster the Bank's confidence that inflation will fall to 2.0% by 2026, as currently projected.

Pound outlook

At Economies.com, we expect that if Bailey's comments turn out less hawkish than markets anticipate, the likelihood of a rate cut in August will rise, putting further downward pressure on the pound.