The British Pound was among the worst performers on the day, as a surprisingly dovish Bank of England Quarterly Inflation Report sunk GBP yield forecasts. Overnight Index Swaps and Short Sterling Interest Rate Futures moved substantially on bankers’ concerns that the frail banking system would be unable to support a recovery in growth. Indeed, implied December, 2009 yields dropped a substantial 10 basis points to 0.87 percent, while 1-year BoE interest rate expectations dropped a similar amount to multi-week lows. The US Dollar’s pullback meant that the GBPUSD was nearly unchanged at the end of the US session, but it unsurprising to note that the EURGBP exchange rate trades near month-to-date highs following BoE developments. UK fundamentals suggest GBP risks remain to the downside, but it continues to be important to watch developments in financial market risk sentiment. Despite the day’s interest rate-sparked moves, the GBPUSD-FTSE 100 correlation remains near all-time highs.
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