Yahoo Finance UK’s Pedro Goncalves writes:

The pound’s rally against the dollar appeared to be running out of steam on Monday as sterling was again weaker against the greenback in early trading.

The pound was 0.1% lower against the dollar at the time of writing, trading at $1.3107.

Traders are increasingly anticipating a quicker pace of monetary easing from the Bank of England, dampening the appeal of the pound, which has been the top-performing currency among the Group of Ten nations in 2024.

This shift in sentiment follows recent remarks by Bank of England governor Andrew Bailey, who indicated that the central bank could pursue a “more aggressive” and “activist” approach to interest rate cuts. These comments sent shockwaves through the market, resulting in the pound’s sharpest weekly decline since February 2023.

Nick Andrews, senior FX strategist at HSBC, described Bailey’s statements as both “deliberate” and “meaningful,” suggesting they could signal a pivotal moment for the currency.

In recent months, investors have favoured the pound, bolstered by expectations that the Bank of England would ease rates more gradually than other central banks, thus preserving the currency’s relatively high yield. Following a substantial rate cut by the Federal Reserve last month, the pound surged to $1.3434, its highest level since February 2022.

However, current market indicators suggest a reversal may be underway. Options contracts reveal that traders are now paying a premium to hedge against a decline in the pound, with sentiment indicators like risk reversals sinking to two-month lows.

However, sterling managed to bounce back against the euro (GBPEUR=X) in early trading, rising 0.1% to €1.1953.