Sterling rose to two-week highs against the euro on Wednesday and steadied versus an otherwise buoyant dollar after the Bank of England signalled that interest rates will be eased more modestly than markets were discounting.
The pound's yield appeal was boosted after the BoE said in its quarterly inflation report that inflation will likely overshoot the central bank's 2 percent target if it cuts rates as aggressively as markets had expected.
As recently as a week ago traders had expected the Bank to cut rates by a further percentage point over the course of the year. But after the inflation report, futures markets discounted around 75 basis points of easing from 5.25 percent.
By 1530 GMT, the euro had fallen by 0.25 percent to 74.15 pence, while sterling was flat versus the dollar at $1.9600. The dollar hit one-month highs against the yen and strengthened against a basket of currencies after a surprising rise in January US retail sales helped cool recession fears.
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