Sterling Drops to Lowest Level since April over Inflation Warnings

The Sterling pound dropped on Thursday's trading to $1.3765 against the dollar, its lowest level since April, after Bank of England Governor Andrew Bailey warned of an exaggerated reaction to rising inflation.

In his annual speech, Bailey said it is important to ensure that the recovery is not undermined by a premature tightening of monetary conditions, as rising inflation is likely to be temporary.

"The lack of validation for higher rates any time soon has weighed upon sterling," said Jeremy Stretch, Head of G10 FX Strategy at CIBC Capital Markets, adding that it will be interesting to see if that remains the case in August when official inflation forecasts "will be substantially revised up".

Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets said that the 'lack of endorsement of higher rates anytime soon has weighed on the pound', adding that the case could be highly revised in August.

The pound also dropped 0.4% against the euro at 86.05 pence after falling to its lowest of 86.15 in two weeks.

The English pound rose nearly 5% against the euro in the first half of 2021, finding some support for the European Union's decision to extend a three-month exemption from customs on refrigerated meat shipments to Northern Ireland, the so called "sausage war".

Last week, sterling was one of the worst-performing currencies after the Britain's central bank kept the size of its stimulus unchanged, saying that inflation would surpass 3%, but that the climb of above its 2% target would be only temporary.

Last week, sterling was one of the worst performing currencies after the British central bank kept the amount of stimulus unchanged, saying that inflation would exceed 3%, but the rise above its 2% target would be only temporary.

Meantime, the dollar strengthened after the Fed indicated that it would raise interest rates and end emergency bond purchases sooner than expected.

Analysts said the post-Brexit spat has had little impact on sterling so far, but could change as policy differences arise between Britain and the EU.