The Governor of the Bank of England releases dovish signals, putting pressure on the pound, which falls to a three-week low

The Governor of the Bank of England has signaled a possible increase in the pace of interest rate cuts, intensifying market expectations for a dovish stance in UK monetary policy, which has put pressure on the British pound.

On Monday, Bank of England Governor Bailey hinted that if the labor market deteriorates faster than expected, the central bank may implement larger rate cuts. This statement quickly resonated in the market, leading traders to increase bets on the Bank of England easing its policy. The money market currently expects the Bank of England to cut rates by a total of 58 basis points by the end of the year, up from about 51 basis points expected last Friday.

Following the announcement, the GBP/USD exchange rate fell by as much as 0.3% to a three-week low of 1.348 dollars. If it closes lower on that day, it will mark the pound's seventh consecutive trading day of decline, the longest losing streak since July 2023.

Multiple Factors Pressure the Pound, Bearish Sentiment in the Options Market Rises

Bailey's remarks have directly altered market interest rate expectations. The money market currently believes that the likelihood of the Bank of England cutting rates by 25 basis points at the next meeting is as high as 80%. This dovish stance sharply contrasts with the Federal Reserve, which is widely expected to maintain interest rates unchanged at least until September. The divergence in policy expectations is putting pressure on the pound.

The weak outlook for the pound is also reflected in the options market. An indicator measuring the demand for call options versus put options, the "one-month risk reversals," has fallen to its lowest point since February this year, indicating that market bearish sentiment towards the pound has reached a nearly five-month high. This indicator's timeframe covers the next meetings of the Bank of England and the Federal Reserve, as well as the August 1 tariff deadline set by Trump, suggesting that traders are hedging against various risk events that may arise in the coming month.

The pressure on the pound is multifaceted: on one hand, according to CCTV News, U.S. President Trump stated on the 7th that starting August 1, tariffs ranging from 25% to 40% will be imposed on imports from 14 countries, including Japan and South Korea. The escalation of trade tensions has strengthened the dollar, putting pressure on non-dollar currencies; on the other hand, the slowdown in the UK’s own economic growth has also exacerbated market pessimism.

This week, investors' attention will be fully focused on a series of key economic data. Both the UK and the US will release the latest inflation reports, while the UK will also publish labor market data. Given that Governor Bailey has directly linked the future pace of rate cuts to the performance of the labor market, the upcoming labor data will be crucial for assessing the Bank of England's next steps and may trigger further market volatility