Sterling hit a two-month low versus the euro and fell against the dollar on Wednesday as the Bank of England's inflation report gave no confirmation that British interest rates would rise again. Before the report, data showed British average earnings growth unexpectedly eased in the three months to March.
The quarterly inflation report showed the BoE saw consumer price inflation hitting its two percent target in two years if it raised borrowing costs to 5.5 percent.
"(The BoE) left all doors open. They didn't want to commit to anything at the moment. By doing this they left the market questioning a little bit because the market had fully priced in a rate hike," said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt. By 1400 GMT the pound had fallen to the day's low of $1.9805, down 0.2 percent on the day. It also hit the two-month low of 68.58 pence per euro, down 0.2 percent.
Sterling's trade-weighted index was steady at 103.4. The BoE said it expected sterling's exchange rate index to fall to 102.5 in the second quarter of 2009 from 104.2.
Some investors expect the BoE to raise interest rates - already the highest among the G7 nations - again later this year although this week's data showing lower inflation calmed such views.
"There's not a clear confirmation here that the BoE are primed for another rate hike. The risk-reward was always the case that should the BoE not validate fully market expectations of another rate hike in the UK sterling was always looking vulnerable," said Mitul Kotecha, head of FX strategy at Calyon.
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