Pound Gains on Inflation Outlook, Weakens on Rates Outlook

The Great Britain pound gained versus the euro today after Britain’s central bank increased its inflation forecast. The currency erased gains against the US dollar and the Japanese yen as the BoE Governor Mervyn King hinted that the interest rates won’t be raised in the foreseeable future.
The BoE wrote in its Inflation Report that “there is a good chance that inflation will reach 5% later this year, and it is more likely than not to remain above the target throughout 2012” and that “the projection is markedly higher over the first half of the forecast period than in February”. The main driver for the growth of the inflation is fuel prices. The prospect for accelerating growth of consumer prices can lead to increase of interest rates by the central bank.
The statement of central bank’s Governor diminished probability of an interest rates hike. King said at the committee of the European Parliament in Brussels on May 2:

The economic consequences of high-level indebtedness now would become more severe if rates were to rise. I think these macro-economic challenges will last many years.

EUR/GBP tumbled from 0.8803 to 0.8683 today as of 21:50 GMT. GBP/USD traded at 1.6353 after rising from 1.6362 to 1.6516. GBP/JPY traded near 132.66 following the advance from 132.30 to 134.03.

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