Sterling hit a six-month low against the dollar on Thursday, extending falls after the central bank forecast higher inflation and weak growth, though it gained against a lower euro. The pound fell 0.4 percent to $1.5482, its lowest since late July, before paring losses to last trade at $1.5520, down 0.2 percent on the day.
The BoE's quarterly Inflation Report on Wednesday said inflation would remain above its 2 percent target until early 2016, undermining households' ability to spend in an economy that is struggling to get back to growth. Analysts said the bearish outlook could point sterling towards a late July low of $1.5458 and then the mid-July trough of $1.5393.
"The (BoE's) Monetary Policy Committee suggested it will allow a temporary increase in inflation and continue to support the economy, which means there is a possibility of more loosening in policy," said Sara Yates, global currency strategist at J.P. Morgan Private Bank. Yates said the pound could drop into the low $1.50s over the next three to six months.
Deutsche Bank strategists said the BoE's failure to bring inflation down towards its 2 percent target was causing "accelerated sterling debasement", and forecast sterling to drop to the low $1.40s and the low 90s per euro by year-end. The Bank of England, however, also stressed a domestic economic recovery was in sight. The euro fell 0.6 percent on the day at 86.02 pence, pulling away from Wednesday's peak of 86.845 pence and the 15-month peak of 87.17 pence struck earlier this month.
Trends in FX options revealed investors were increasingly looking to buy protection against the pound falling further against the dollar. One-month risk reversals showed the premium demanded to buy bets on sterling falls at its highest since July 2012.