Sterling fell after the Bank of England released their policy meeting minutes and the currency is expected to remain weak in the near term before strengthening. The BOE warned that headwinds may be greater than assumed signalling that the probability of further quantitative (QE) is much higher than the banks inflation forecast suggests.
The central bank expects UK inflation to hover around the targeted rate of 2 percent as mentioned in its updated quarterly inflation report. However the BOE minutes show that several Monetary Policy Committee (MPC) members saw the decision not to expand QE as “finely balanced”.
Thus it is easy to see that more MPC members could change their stance and shift their vote next time to more QE. We have already seen recently outgoing member Adam Posen made comments that suggest that he will change his vote at the next meeting and it is likely that others are not too far behind in shifting their votes.
Meanwhile, weighing further on the pound were weak UK retail sales figures. April sales fell by2.3 percent, much more than the expected 0.8 percent, sliding at the fastest pace in two years. This highlights the ongoing weakness of the British economy and adds more fuel to speculation about another cash boost from the Bank of England.
GBPUSD tumbled to a two-month low of 1.5676, down 0.5 percent on the day so far.
GBPJPY fell to a three-month low of 124.45