The pound took a beating in Wednesday trade, plunging 150 pips in a very short period after BoE Governor Mr. Mervyn King said that a weak pound would help the U.K. economy, mainly in the effort to rebalance its ever-widening trade deficit.
These comments came during the BoE Inflation Report press conference and speech, which is the primarily method used by the Bank of England to communicate with the market. Together with these comments, the BoE also lifted the inflation projections over the next two years, up to 1.62% from 1.42% estimation back in August.
The upwards revision was triggered by better than expected GDP growth forecasts. At the same time, the BoE expects the inflation rate to reach the bank's target of 2% by mid 2012, nearly 3 years away.
The market had been pricing in the fact the BoE will lag behind the European Central Bank and behind the Federal Reserve, in regard to when central banks will have to tighten their monetary policy, and raise interest rates to tame potential inflationary pressures. Such fragile inflation rates confirm that the BoE will not be able to lift the key interest rate any time soon.
In other words, it means that the interest rate differential between the pound and the other two major currencies, the euro and the dollar will increase, something that would put depreciation tensions on the Great British Pound.
Right now the Gbp's 12-month LIBOR rates are below the Eur and the Usd similar maturity rates, which further points to the fact that the market thinks the BoE has its hands tied in dealing with the creation of growth, and the removal of quantitative easing programs.
Disclosure: No positions