Sterling dives as Bank of England launches ‘sledgehammer’ easing

Sterling dropped on Thursday, on track for its largest one-day fall in a month against the dollar, after the Bank of England cut interest rates and restarted bond purchases in a move to mitigate the impact of Britain’s vote to exit the European Union.

The dollar, meanwhile, gained against a basket of currencies for a second straight session, as investors continued to balance positions ahead of Friday’s crucial US nonfarm payrolls report for July. The focus, however, remained squarely on the British pound in the wake of the widely-expected BoE decision. As well as cutting rates to a record low of 0.25 per cent from 0.5 per cent, the BoE launched two new schemes, one to buy £10 billion (€11.8 billion) of high-grade corporate bonds and another - potentially worth up to £100 billion - to ensure banks keep lending even after the rate cut.

Sterling sank 1.5 per cent against the dollar in the first half hour after the decision and as BoE Governor Mark Carney started speaking. It was last down 1.4 per cent at $1.3128, and trading at €1.1784 against the euro, down from an open of €1.1952.

Dovish

“The BoE’s dovish guidance and bearish outlook for growth will leave the pound at risk of further falls in the months ahead,” said Joe Manimbo, senior market analyst at Western Union Business Solutions.

“Still, market positioning and how negative bets on the pound have reached stretched levels could help to slow moves to the downside.”

The Australian and New Zealand dollars, which have suffered in the past week from worries that central banks globally would not meet market expectations for further policy easing, rose around half a per cent against the USs. dollar.

Sterling money markets moved to price in further falls in the Bank of England’s interest rates after it said most of its policymakers are likely to back a cut to zero if economic data was in line with forecasts in the months ahead.

On the other hand, the dollar, driven to a six-week low after a poor U.S. second-quarter gross domestic product (GDP) reading last week, drew strength from the gains against sterling.

The dollar index gained 0.1 per cent to 95.674, holding above a low of 95.003 touched earlier this week.

Reuters