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Cable Climbs on BOE Growth Forecast

David Becker
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Sterling moved higher on Wednesday on the heels of the Bank of England’s inflation report and a statement by the BOE on forward guidance. The yield differential at the short end of the interest rate curve moved in favor of the Pound and allowed sterling to gain traction against the greenback. Interest rates in the US moved higher as stocks gained ground but at a slower pace relative to UK interest rates.

The Bank of England has increased its outlook for the U.K. economy, predicting that 2014 GDP will grow 3.4% versus a previous forecast of 2.8%. However, Governor Mark Carney indicated that the recovery is neither balanced nor sustainable, and with spare capacity high and inflation benign, the degree of stimulus will need to remain robust for some time. The BOE had said it would keep interest rates low until unemployment falls to at least 7%. Carney indicated that the new forward guidance would look at a broader range of economic indicators, without being too specific.

Meanwhile, new Fed Chairm Janet Yellen has pledged to retain the Fed’s super easy money policies, a GOP-led House has agreed to suspend the U.S. debt ceiling by a whole year with much pushback. The House has authorized a one-year extension to the government’s borrowing authority until March 16, 2015 without any conditions by a vote of 221-201. The measure now needs to be approved in the Senate.

The 2-year yield differential between the UK and the US moved up to 20 basis points which is the highest the differential has been since November of 2011. The yield differential is what is used to calculated the forward curve which is a guiding force behind the movements of the spot rate of the GBP/USD.

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