Sterling has given up all the gains it made in the second half of yesterday, as a fairly downbeat inflation report from the Bank of England prompted concerns among investors about the sustainability of the UK’s economic recovery.
The bank’s quarterly inflation report warned that the downside risks to the UK economy were increasing, with inflation remaining below target in the medium term. With central bank intervention being the theme of the day, the possibility exists that the BoE will opt for further quantitative easing. Gilt yields have fallen today as investors move back into UK bonds, partially as they are still viewed as part of that rapidly-diminishing asset class – the safe haven. With both the UK and US struggling to find solid economic growth, and with both the BoE and the Fed leaning towards more easing, yield-seeking investors will find choosing between these currencies rather trying, since neither central bank will be close to lifting rates in the near future.
The Fed has now committed itself to ultra-low rates (indeed, almost negative in real terms) until 2013, and only the bravest of economists is prepared to forecast a rate hike from the BoE in 2012.