The Bank of England inflation report is a slight negative for Sterling as interest rates will stay at very low levels, but much of this has already been priced in following the quantitative easing surprise announcement last week. Sterling should be able to avoid heavy losses from current levels unless there is a sustained deterioration in risk appetite. The Fed statement will also be very important for Sterling direction against the dollar. Overall, Sterling rallies against the dollar are liable to stall in the 1.6570 region

Sterling consolidated just below 1.65 against the dollar on Tuesday and near 0.8580 against the Euro. Sterling edged lower on Wednesday as the dollar gained ground.

The unemployment claimant count increase was slightly lower than expected at 24,900 for July, but the ILO unemployment rate was higher than expected with a rise to a 13-year high of 7.8% and the impact should be broadly neutral.

In its quarterly inflation report, the Bank of England warned that inflation would significantly undershoot the 2.0% target in two years time if interest rates are increased in the first quarter of 2010. The bank was slightly more optimistic over economic prospects, although the underlying tone was for extreme caution and uncertainty over the outlook.