Above: Governor Andrew Bailey. Image copyright Pound Sterling Live, courtesy of Parliament.tv

Pound Sterling has fallen to its lowest level since 1985 against the U.S. Dollar, and is looking poor against all its major competitors.

This after a fresh intervention by the Bank of England that left investors with the impression it would not be raising interest rates by 75 basis points on September 15.

The Pound to Dollar exchange rate (GBP/USD) fell to a low of 1.1407, levels last seen 37 years ago, after Bank of England policy makers hinted there was no reason to be hasty in raising interest rates.

Money markets started the day with an expectation the Bank would opt to raise interest rates by 75 basis at the September 15 policy meeting.

But, Bank of England Governor Andrew Bailey and other members of the Monetary Policy Committee (MPC) pushed back against these expectations when appearing before UK lawmakers on Wednesday.

Testimony by Bank of England Chief Economist Huw Pill suggested policy makers now expect Liz Truss to do the heavy lifting in fighting inflation. Truss will announce on Thursday a series of measures to help households and businesses that could include a cap on energy bills.

"Net-net on the implications for headline inflation in the short term, I would expect that to see a decline," said Pill of the plans being floated by the government.

Following the testimony money market pricing showed the odds of a 75 basis point hike next week have fallen to 55%, from 71% earlier in the day.

Strategist Jordan Rochester at Nomura says any peak in near-term inflation stemming from the government's energy support measures could prompt the Bank of England to step back from raising interest rates.

"Artificially lower energy prices for consumers will remove pressure on the BoE to be as hawkish in the near term. UK consumers will pay less, but the government will pay a lot more and the UK’s trade deficit will widen further – a completely different story to the COVID-19 spending outcome when the trade balance improved," says Rochester.

The Pound fell alongside these falling rate hike expectations and Rochester says in a recent research note he expects further falls ahead.

Above: The GBP/USD's relentless decline. Set your FX rate alert here to keep an eye on key levels.

The Pound relies heavily on the inflow of foreign capital to keep it propped up, this is simply because the UK is a net importer meaning it pays out more than it brings in through export receipts.

One of the most important means of attracting this foreign investor capital is by offering superior returns on UK assets, most notably government bonds.

The yield these bonds pay out is in part a function of the Bank Rate set at the Bank of England.

Rising Bank of England rate hike expectations therefore provide a draw for foreign capital, which aids the Pound.

But when expectations decline, the Pound tends to suffer, as is currently the case.

The outlook for the Pound therefore looks dire, thanks to a vulnerable economic outlook and a Bank of England that is not willing to aggressively pursue inflation via higher interest rates.

There is little on the horizon to suggest the blood letting will stop. Those looking to buy dollars could consider locking in current rates for use at a future date to protect against any further loss in value.

Rochester says he continues to bet on a falling Pound as the UK government will need to issue billions in fresh debt to help relieve households and businesses of the pain of rising energy bills.

He says this issuance leaves the Pound vulnerable, particularly as the Bank of England no longer buys government bonds (via quantitative easing).

"The current crisis is unlike any we’ve seen in the recent past, especially with a lack of fresh QE to soak up this fresh issuance," says Rochester. "It’s a recipe for the balance of payments to continue to deteriorate, the UK’s terms of trade to worsen and with it GBP’s value to fall."

Nomura retains a sell on GBP/USD, looking for 1.10 by end-October and 1.06 by year-end. Those looking to protect their dollar payments should consider locking in current exchange rate levels for future payments, find out more here.