On Friday, the pound enjoyed strong buying interest as Italian bond yields fell on news that the Italian parliament had passed key budget laws that would pave the way for Silvio Berlusconi’s departure.
This instigated a strong rally across riskier asset classes, with money flowing into the likes of the euro, the Aussie and the pound. Having closed Friday’s Australian session around the 1.5930 mark, the pound surged to an overnight high of 1.6094, before finishing at 1.6066. Upon reopening for Asian trade, the pound is little changed, hovering around in the 1.6060s. Looking at the week ahead, a key focus will be the BoE's inflation report on Wednesday. It seems likely that the BoE's forecasts for GDP growth over coming quarters will be significantly marked down, even after taking account of its increase in asset purchases.
Perhaps more importantly, assuming unchanged interest rates and asset purchases (275 billion pounds), the bank may forecast inflation, undershooting the target by around three or four tenths at the two-year time-horizon. This would clearly support the view that the risk is for further quantitative easing. Also of significant interest, will be any update on developments with banks' funding problems and the overall availability of credit to the economy. Of additional importance during the week will be CPI inflation data for October, which should reveal that inflation peaked in September at 5.2%, plus the latest labour market data.