Over the past five trading days, the British pound has rallied more than 300 pips.
Stronger economic data and a hawkish Quarterly Inflation Report have reduced the chance that the Bank of England will ease interest rates aggressively. With inflation potentially breaching the government’s 3 percent limit, the BoE will be treading very carefully going forward. Unless they believe think that growth will slow materially, they will prefer to space out rate cuts in order to prevent inflation from getting out of hand. They are in the same situation as the Fed was last year where they are juggling persistent inflationary pressures with slowing growth. When data materially worsened and the credit crunch got out of hand, the Federal Reserve was forced to shift their focus away from inflation and onto growth, which was when they began cutting the discount rate and then the Fed funds rate.