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After some temporary relief, the UK currency weakened sharply on Wednesday. Sterling weakened to all-time lows near 0.84 against the Euro and also dipped to below 1.50 against the dollar which was the lowest level for over six years.
In the quarterly inflation report, the Bank of England took a very negative attitude towards the economy with Bank Governor King warning that it was already in recession with an important risk of a serious recession. The bank lowered its inflation forecasts and stated that it was likely to be below the 2.0% target level on a two-year view if interest rates were unchanged.
These forecasts imply that interest rates will be cut again in the short term with markets expecting another substantial rate reduction at the December MPC meeting. King stated that Sterling weakness was not surprising, although he also warned that the bank would need to take import costs into account when determining the appropriate level of interest rates.
The report overall will maintain a very negative sentiment towards the UK economy and currency in the short term with expectations of further rate cuts and Sterling was trapped below 1.50 against the dollar on Thursday.
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