Talking Points:

- The Bank of England says the 7% Unemployment Rate should be hit in January.

- BoE expects inflation to run at +1.9% over next 3-years.

- UK yields jump in the “belly” of the curve, lifting the British Pound.

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One of the fastest growing developed economies in Europe, the United Kingdom may be the first to see its policies exit the post-crisis management era. A return to normalization was further ushered along today with the release of the Bank of England’s Quarterly Inflation Report, which has outlined an optimistic perspective on the UK economy going forward.

Even though Governor Mark Carney and the Monetary Policy Committee of the BoE still believe that the economy warrants a low main refinancing rate – no rate hike any time soon – the burgeoning economic prospects are too great to ignore. The BoE upgraded its 2014 GDP forecast to +3.4% from +2.8% in November, as well as its 2015 GDP forecast to +2.7% from +2.3% in November.

GBPUSD_Surges_Through_165_on_BoEs_Quarterly_Inflation_Report_body_UKyields.jpg, GBP/USD Surges Through $1.65 on BoE's Quarterly Inflation Report

How the BoE intends on keeping rates pinned lower despite its belief that the economy will reach the point of positivity that it will trigger a stimulus exit mechanism, the market seems to think is an important question too. So much so that the initial selloff seen related to the BoE – UK yields drop, the British Pound drops – last no more than a handful of seconds.

Now, the UK yield curve is behaving in a manner similar to which the US yield curve did during mid-2013, which supported US Dollar strength: the “belly” (3Y to 7Y notes) are seeing their yields increase by the most.

GBPUSD 1-minute Chart: February 12, 2014 Intraday

GBPUSD_Surges_Through_165_on_BoEs_Quarterly_Inflation_Report_body_x0000_i1028.png, GBP/USD Surges Through $1.65 on BoE's Quarterly Inflation Report

Charts Created using Marketscopeprepared by Christopher Vecchio

The GBPUSD initially slumped on the release of the report, dropping from $1.6485 to as low as 1.6444. However, the weakness was extremely short-lived: the low occurred in the minute the QIR was released. The pair immediately ripped to new highs to close the first minute at 1.6520 as UK yields turned higher. At the time this report was written, the British Pound continued to climb versus the US Dollar, at 1.6548 from a high of 1.656.

--- Written by Christopher Vecchio, Currency Analyst

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