Although the Bank of England appears slightly more confident over the economic outlook, there is a stronger perception that the bank also wants a weaker currency. These expectations will tend to maintain weak confidence towards Sterling and there will be fears that selling pressure could accelerate, especially given the already very serious fears over the government debt outlook. Sterling risks will increase sharply if there is a wider deterioration in risk appetite. Overall, there is likely to be a weaker net trend with losses towards the 1.60 level against the dollar.
The Bank of England minutes recorded a 9-0 vote for unchanged interest rates and to hold the Asset Purchase Facility at GBP175bn. Three members expressed support for a larger package of quantitative easing, but decided to vote with the majority. The bank was slightly more confident over the outlook and warned over the potential medium-term inflation risks, but also still pointed to important downside risks for the economy.
There will still be opposition to any near-term policy tightening and markets will be expecting a prolonged period of very low interest rates and a policy of targeting a weak currency.
Sterling pushed to a high above 1.6450 against the dollar, but failed to hold the gains and retreated to 1.6350 as the US currency secured some relief.
Sterling came under renewed pressure on Thursday following reported comments by Bank of England Governor King that the Sterling decline will help rebalance the UK economy.