Forex - GBP/USD hits 3-week low on BoE inflation report, EU fears

Forexpros – The pound was down sharply against the U.S. dollar on Wednesday, sinking to a three-week low after the Bank of England lowered its forecast for growth and inflation, while fresh fears over a French sovereign debt downgrade saw risk aversion sharpen.

GBP/USD hit 1.6160 during U.S. morning trade, the lowest since July 21; the pair subsequently consolidated at 1.6175, dropping 0.83%.

Cable was likely to find support at 1.6068, the low of July 20 and short-term resistance at 1.6409, Tuesday’s high.

In its quarterly inflation report, the Bank of England said that it expected inflation to ease towards its 2% annual target by the end of 2012 and dip slightly below target in 2013.

“The central projection for inflation in the medium term is a little below the 2% target, and a little lower than in May, reflecting the somewhat weaker outlook for the level of demand,” BoE Governor Mervyn King said.

The BoE added that economic growth was likely to remain "sluggish" in the near term, prompting the central bank to cut its year-end growth forecast to just below 2.0% from to 2.5% at the time of its May inflation report.

King said that, “in the committee’s view, the weakness in underlying activity is likely to be somewhat more persistent than previously expected.”

The statement added to the view that the central bank would keep rates at a record low for a longer period, while also reaffirming expectations the bank could introduce further easing measures if the economy deteriorated.  

Meanwhile, French President Nicolas Sarkozy met with Bank of France Governor Christian Noyer earlier in the day, as well as with a number of government ministers to discuss the country's economic and financial situation.

The meeting comes amid mounting fears that France's top-tier AAA credit rating could be downgraded if the euro zone sovereign debt crisis worsened.

Elsewhere, the pound was higher against the euro, with EUR/GBP shedding 0.45% to hit 0.8771.

Earlier in the day, official data showed that U.S. wholesale inventories rose 0.6% in June, the smallest gain since November 2010, disappointing expectations for a 1.0% gain.

Later Wednesday, the country was also to produce data on the federal budget balance.




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