British Pound Sterling (GBP) on 12/02: Sterling in Hefty Gains as Bank of England Confirms Interest Rate Hikes Ahead

British pound to Euro exchange rate: 1.15 pct higher higher at 1.2203.

British pound to US dollar: 0.67 pct higher at 1.6562.

British pound to Australian dollar: 0.58 pct higher at 1.8313.

British pound to Canadian dollar rate: 0.56 pct higher at 1.8211.

British pound to New Zealand dollar rate: 0.54 pct lower at 1.9879.

British pound to South African Rand rate: 0.74 pct higher at 18.1814.

BE AWARE: All the above quotes are taken from the wholesale inter-bank markets. Your bank will affix a spread to the rate at their discretion when passing on a retail rate. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.

Jean-Pierre Dore at Western Union on the prospects for GBP in coming sessions:

"Sterling is the outperformer on the day, following the BoE’s inflation report, which saw upward revisions to GDP forecasts, and sparking talk of interest rate hikes sooner than previously expected.

"Also, Governor Carney shifted focus to spare capacity utilisation in the economy from a determined focus on an unemployment threshold of 7 percent, with expectations that the slack in economic output to pre-crisis levels is not expected to be eliminated for another three years, albeit it at a faster rate than previously expected.

"All of this has pushed the GBP higher across the board, with scope for further gains against the USD above the 1.6600 level in coming sessions."

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The Bank of England’s policy of ‘forward guidance’ and its related policy communications have made the majority of companies feel more confident about the near-term prospects for the UK economy, according to a survey conducted by Markit.

Investment plans have been boosted by changes in Bank policy.

Three-quarters of all companies surveyed expect the Bank to raise interest rates within the next two years.

RBS react to today's Quarterly Inflation Report:

"Overall, the immediate market reaction (slightly higher front-end rates, a rise in sterling) looks justified: There is less explicit forward guidance on monetary policy. Still, the BoE's general rhetoric around the economic outlook seems barely altered (ie, cautious/dovish) and the key economic variable for monetary policy – the CPI inflation projection – is marginally lower.

"On balance, the risks around our forecast for the first Bank Rate hike in Q3 2015 have shifted towards an earlier rise (ie, Q2 2015)."

"Part of the interpretation of the GBP’s strength around the QIR was related to the fact that the ‘de-emphasis’ of the unemployment rate threshold was already in the price. The BoE’s interpretation of ‘spare capacity’ has kept the GBP rally restrained for now, but the rough ‘blueprint’ for Bank Rate hikes further out is GBP supportive." - Stephen Gallo at BMO Capital.

Please Click here for a roundup of today's Bank of England inspired rally.

Chancellor George Osborne is likely to reject a currency union, the BBC and the Guardian have today reported. Suggesting cross-party support for the move, Osborne's intervention in the currency debate will be echoed by Ed Balls, the Labour party's finance spokesman, and by Danny Alexander, the Liberal Democrat finance chief.

A double does for the GBP/EUR with the euro exchange rate complex under pressure on talk of negative deposit rates in the Eurozone. Benoit Coeure and Liikanen being attributed.

The British pound is rallying as Carney fails to talk down the currency. Note that Charlie Bean has said it is better to tighten policy before slack in the economy is completely eliminated.

Snippets:

Sterling higher

Bank to focus on wages

MPC won't take risks with recovery

Productivity growth has not happened. Carney concedes it is particularly difficult to forecast or ascertain. Perfect for vague forward guidance to step in.

"Indirect criticism of strong sterling - says that weak world demand and pound strength will dampen exports." - Forex.com.

"All eyes will be on the BOE Inflation Report, with the forward guidance expected to be watered down somewhat by Carney. Although the pair has cleared the 55-day MA (1.6417), expect resistance to emerge around the 1.6500 vicinity. Expect a flattish/top heavy stance in the interim." - Emmanuel Ng at OCBC Bank.

An interesting snippet from Citigroup concerning the floods:

"GBP rose as recent floods and storms in UK may result in at least partial repatriation by insurance companies of foreign assets into GBP."

With the floods continuing it is hard to tell as to how much money will come flooding into the UK as a result of the ongoing rains.

"Many parts of the country are now saturated, which means further flooding is inevitable as the rain continues to fall. Parts of the Thames are now flooding too, affecting higher density areas," said Justin Gott of insurance firm Hiscox. "If the rains continue into March or April, it's not impossible for this to become a £1bn event."

James Rakow, insurance partner at Deloitte, said he expected household insurance claims for flood damage to average £30,000 to £40,000 each.

"Today, market will focus on the U.K. quarterly inflation report. The BoE is expected to keep the forward guidance unchanged and reiterate to withdraw its support for credit market gradually, showing the confidence of U.K. economy and credit market. This may be GBP-supportive. Technically, GBP/USD may test higher to January’s top at 1.6668, with support at 1.6252." - Citigroup.

Analyst Geoffrey Yu at UBS gives the following sterling exchange rate forecasts for today:

"The pair bounced sharply over the past few sessions from the main support at 1.6220. Resistance focus is at 1.6509, a break above which would be positive, opening the way to 1.6668."

EUR/GBP:

"While resistance holds on closing basis at 0.8349, the cross remains vulnerable as bearish conditions persist. Support is at 0.8259 ahead of 0.8160."

Further potential moves in GBP/EUR could be realised this afternoon when the ECB's Praet and President Draghi address markets.

KBC Markets say:

"Regarding ECB speakers, it is unlikely that they will bring new info to the market. The ECB meeting has just passed and no new eco info of interest has become available. Markets reacted subdued after both the ECB meeting and the US payrolls.

"A wild card is the decision of the German constitutional Court. There was only a very dry press comment, but we think it is unlikely the ECB governors will poke in this issue, while the European Constitutional Court will need time to examine the case."

"The February Inflation Report will be released at 11:30 CET/10:30 GMT. We expect Mark Carney to maintain the current line of "no immediate" hike while saying that the MPC will look at a broad range of measures of economic slack to gauge whether the bank rate is appropriate." - UniCredit.

Lloyds Bank Research tell us what to keep an eye on today:

"Carney’s comments at Davos and others elsewhere suggest that there will be no new formal targets or thresholds introduced at this stage, and from here on we are effectively back to looking at a broad range of data that guide the inflation forecast. This forecast will therefore probably once again be the main focus.

"Markets expect the inflation forecasts to be reduced, mainly because of lower inflation in recent months, and the Bank’s objective in the report and the press conference will no doubt be to promote the idea that rates will remain unchanged for at least the next year, and this suggests that the inflation projections will be at or below 2% on the 2 to 3 year horizon. While an honest assessment of the UK data since the last report might have to conclude that the most convincing change is the strength of employment data, the Bank seems unlikely to be keen to emphasise this given their desire to keep expectations of a rate rise in check. There may be some modest upside risks for GBP, given the decline in short end yields in recent weeks, but we would not expect major gains."

The big event for currencies over the past 24 hours was the testimony of Fed Chairman Yellen to Congress; she did a good job at soothing global market jitters over the issue of Fed tapering.

"Currency and equity traders liked what Janet Yellen had to say today. Her promise of continuity and taking 'measured steps' in reducing stimulus was well received by the market. In reality, she did not say anything new. The Fed plans to keep rates low for a very long time and want to rethink their unemployment rate threshold because the labor market conditions, growth and inflation are still at undesirable levels." - Kathy Lien at BK Asset Management.

UBS have, ahead of today's Quarterly Inflation report shown that the long-term outlook for sterling is challenging. Analyst Geoffrey Yu says the issue at hand concerns the liquidity preference (i.e demand for money):

"The policy implications from the BoE's inflation reports will dominate proceedings for short-dated interest rates, and sterling by extension. However, for investors looking at structural trends and concerned about the nature of the UK's economic growth, any form of MPC guidance seems to matter far less. Liquidity preference for sterling remains highly challenged, for which stable FDI flows will struggle to compensate."

"For sterling, there was a structural drop post the 2008 period of volatility, driven by financial sector 're-rating' of its safety perception. Due to the Eurozone crisis, however, there was brief recovery – for all of the UK's problems sterling's very existence was never in doubt – but since the advent of the ECB's new facilities, this 'preference driver' for sterling has fallen once again, without any sign of momentum reversing."

The key theme is whether Carney will make any reference to the strong sterling today. In his Scotland speech, he stated that its strength is hampering export growth. If he reiterates this, this will be GBP negative.

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