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Market Update

The pound dropped off this morning after Bank of England Governor Andrew Bailey warned against over-reaction to rising inflation in Britain.

Bailey said in his annual Mansion House speech that it was important to ensure that the recovery was not undermined by a premature tightening in monetary conditions, as a rise in inflation was likely to be temporary.

Sterling was one of the worst-performing G-10 currencies last week after the BoE kept the size of its stimulus programme unchanged and said inflation would surpass 3%, but that the climb further above its 2% target would be only temporary.

But analysts said cable was faring relatively well versus a strengthening dollar, after the U.S. Federal Reserve signalled it would raise interest rates and end emergency bond-buying sooner than expected.

Sterling continues to show good resilience to the dollar’s appreciating pressure compared to other G10 peers, with markets still reluctant to price in a risk premium related to the fast spreading of the Covid-19 Delta variant in the UK.

Daily confirmed cases have been rising for weeks in Britain, but a rapid vaccination programme appears to have weakened the link between infections and deaths.

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