The market had been expecting a slightly more hawkish press conference following the release of the Bank of England’s Inflation Report, however sterling bulls were disappointed to hear that little had changed in the way of rhetoric causing investors to readjust their position when it comes to the pound. GBP/USD and GBP/EUR fell throughout the morning following the report as it became apparent that the BOE is in no rush to pave the way for the first rate hike since the middle of 2007.
Despite an upgrade to growth forecasts for 2015 and mentions that the market should prepare for rate hikes, we have to remember that the size of the UK economy is still below its 2007/08 peak. On top of this inflation is running well below the 2% target and likely to remain so as sterling’s appreciation over the past few years has taken it to levels not seen since 2008. The BOE doesn’t want to fan sterling’s strength further and risk choking off the recovery, although the pound would have to go a great deal higher in order for it to start becoming a concern. Base rate remains at 0.5% and is unlikely to rise until well into 2015, which makes GBP/USD’s test of 1.7000 that little more difficult in the near-term.