Sterling fell broadly on Wednesday, hitting a three-week low against the euro after the Bank of England released dovish inflation forecasts and left open the door to extending quantitative easing. In its quarterly inflation report.
The BoE forecast price increases would be well below its 2 percent target in two years' time if interest rates rise as markets predict, suggesting rates could stay at record lows for longer than previously thought.
BoE Governor Mervyn King added to the dovish tone, saying it was "far too soon" to conclude that the bank's quantitative easing programme was over and said further asset purchases would be made if necessary. The signal of an extended period of ultra-loose monetary policy pushed sterling down nearly two cents from its high of the day against the dollar and to a three-week low versus the euro.
"(The inflation report) leaves the door open to further QE or, alternatively, implies that the market is being too aggressive in its expected timing of interest rate hikes," said Credit Agricole CIB analyst Slavena Nazarova.
At 1528 GMT, sterling was down 0.8 percent against the dollar at $1.5574, compared with a high for the day of $1.5766 hit shortly before the BoE release, and left the pound not far from an 8 1/2-month low of $1.5535 hit on Monday. The euro hit a three-week high of 88.19 pence, just shy of its 200-day moving average at around 88.30 pence, and was last at 87.84, up 0.1 percent.
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