Pound weakens against the euro following BoE's Quarterly Inflation Report

The pound weakened against the euro yesterday, finishing the day at 1.1142.

• In early trading yesterday the euro weakened against the pound, as strong results released by Sainsbury’s buoyed investor mood that an economic recovery in the UK would soon be underway. The supermarket chain reported underlying profits of £543 million, up 11.3% from a year earlier.
  
• However, sterling’s early rise was soon capped amid speculation about the Bank of England’s Quarterly Inflation Report out mid-morning. Its release prompted a steep fall in sterling after the bank slashed its year-on-year growth forecast to -4.5% at its lowest point, adding that the UK’s recovery would be “slow and protracted”. The BoE also said it did not expect the country’s economy to grow until the middle of 2010. This induced an immediate flight away from the pound, quickly strengthening the euro by over half a cent.
  
• Governor Mervyn King’s admission that he remains comfortable with the recent depreciation in sterling was also a blow to the pound, although he did say it provided one of the reasons to believe economic activity will rebound in the short-term.
  
• Finally, the BoE’s forecast that inflation will fall to 0.5% before rising to just above 1% in two years’ time did little to ease the pound’s plight, with most analysts agreeing that interest rates will have to remain at their current low level of 0.5% for the foreseeable future, and a further extension of the central bank’s quantitative easing program cannot be ruled out. This news further weighed on the pound, strengthening the single currency.
  
• In early trading today the pound has pared some of yesterday’s losses as investors continue to digest yesterday’s news.
  There are no major data releases due in the UK today, whilst in the eurozone, the ECB’s Monthly Report is out at 09.00 BST.