Sterling on the back foot this morning

Sterling is under pressure this morning after comments by Bank of England Governor Andrew Bailey, who told The Guardian newspaper that the central bank could become “a bit more aggressive” in cutting interest rates provided the news on UK inflation continued to be good. The pound has fallen to around $1.3160 against the dollar (more than a cent lower from this time yesterday morning), and has slipped to about £0.8385 against the euro (from around £0.8330 yesterday morning). The euro dipped to $1.1025 against the dollar in overnight trading before recovering a touch to $1.1040.

The market was already full priced for a 25bps rate cut at next month’s BoE meeting before Bailey’s comments, and has now raised the chances of a similar move at the following meeting in December. This is contributing to a modest fall in UK bond yields at the open this morning, more so at the shorter-end end of the curve. Yields elsewhere are marginally higher at the start of play today, having backed up quite a bit yesterday following Tuesday’s decline.

ECB member Schnabel says the central bank “cannot ignore the headwinds to (economic) growth” in the Euro area, adding that “with signs of softening labour demand and further progress in disinflation, a sustainable fall of inflation back to our 2% target…is becoming more likely.” Her comments echo those of her boss, Christine Lagarde, on Monday, which clearly pointed to the ECB cutting rates at this month’s monetary policy meeting.

Yesterday’s ADP jobs report in the US was a bit firmer than expected, with private employment increasing by 143k in September. Jobs growth averaged 119k a month in Q3, down from circa 166k a month in both Q1 and Q2, pointing to a cooling of labour demand in the economy (which is a key reason the Fed is now in the process of  “recalibrating” its monetary policy stance).

Looking to the day ahead, there are a number of economic data releases due, including producer prices in the Euro area; weekly jobless claims, capital goods orders and the ISM services index in the US; as well as final readings for the September services PMIs in the main economies.