Sterling strengthened against all of its major counterparts, to hit a six week high against the euro and pass $1.61 against the dollar, following the Bank of England inflation report this morning.
The BoE revised up its outlook for inflation over the next two years, further reducing the chances of an increase in monetary easing. The bank adjusted its forecast, stating that inflation is likely to remain above the 2% target, possibly through until the end of 2012. With a VAT rise of 2.50% due on January 1st, a move to increase the asset purchase programme would put too much upward pressure on an already above target rate of inflation.
The report did still have the hallmark of a dovish Mervyn King, outlining the significant uncertainties that surround the UK economy and problems that it faces next year (not to mention the vicious government spending cuts). After all, a Japanese-style scenario still looms with the possibility of high inflation and low growth over the coming months/years.
In other news, the single currency is at its lowest figure against the greenback since May, proving that the new debt issues surrounding the eurozone are starting to take their toll. If the troubles continue to hit the headlines we could see investors run from the euro as we head towards Christmas.
Tom Hampton
Analyst – Caxton FX
