Sterling Under Pressure on Dovish Talk From BOE

Sterling is being weighed by some very dovish comments from the Bank of England on Wednesday.

Following the publication of the central bank’s Quarterly Inflation Report on Wednesday, BOE Governor Mervyn King told reporters in London that now would not be appropriate to raise interest rates, but that further asset purchases have not been ruled out.

He added that he stands behind the new government’s initiatives to reduce the deficit quickly, and that the euro zone “clearly” needs some kind of fiscal union.

The comments add to the view that rates could remain lower for a longer period of time, an unexpected development for the FX markets which thought that the central bank could be concerned about recent inflation rates.

Meanwhile, the Quarter Inflation Report said that nation’s downside growth risks have increased somewhat, but that the nation’s budget cuts could need to be more demanding than previously thought.

The report also forecasts CPI growth of 0.6% by the end of 1010, and 1.7% by the end of 2011.

The threat of weaker than expected growth, means that interest rates could remain lower for a longer period than expected, a development which is hurting the currency on Thursday.

The dovish talk was also strong enough for markets to ignore a better than expected jobs report on Thursday.

According to the office for National Statistics, UK jobless claims declined 27.1k in April, faster than calls for a 20.0k pullback and adding to a 32.7k decline in March. The claimant count rate fell to 4.7% despite expectations for no change to the prior 4.8% level.

Although the data are good for the pound sterling, the currency is being weighed upon by the threat of low interest rates for a longer period of time.

GBP/USD last traded lower by 19 pips at 1.4928 after trading between 1.4861 to 1.5045 today. Short term resistance lies at 1.5054, 1.5391 and then 1.5498 and 1.5575, with support at 1.4477, 1.4398 and 1.4111.