Jane Foley, Research Analyst at Rabobank, suggests that Sterling has risen against the USD this week and the move will likely add to the widespread expectation that the Bank of England is likely to be in no rush to hike interest rates. Key Quotes “That said, the pound is holding onto most of the losses made vs. the EUR during December and the first half of January. As a consequence the UK’s effective exchange rate is still trading well below the levels maintained through H2 2015. During December and early January investors clearly lost faith in the pound. Sterling’s falls in this period were a reflection of a spate of poorer UK data, particularly in the manufacturing sector, and an increase in expectations that it could be some time before the BoE started to hike interest rates. The futures curve, which has been pointing to the risk of steady rates until 2017 for some time, is currently suggesting that there is a greater chance of a BoE rate cut this year than a rate hike. Additionally the market was coming around to the belief that an EU membership referendum could be called for this year and that this would be a trigger for political uncertainty. Having notched up substantial losses by the middle of January sterling ran into short covering pressures. Sterling has now adjusted to the prospects of a lengthy wait before the BoE hikes rates. The minutes of the January MPC meeting concede that the recent declines in the prices of oil and wholesale gas will moderate the extent to which annual CPI inflation is likely to rise over the coming months. The Bank’s updated projection is for CPI inflation to increase slightly more gradually than the path described in the November Inflation Report, rising to 0.5% or so by the early months of 2016 and remaining around that level for several months. Although the tone of today’s Quarterly Inflation Report is likely to be dovish, its thunder has likely been stolen by Carney’s remarks in January that now ‘is not the time’ to hike interest rates. Although GBP may soften a touch on the back of dovish headlines from the Bank today, with a long wait for a rate hike already priced in, we would not expect the Inflation Report to have a lasting impact. By contrast we would expect politics to have a greater impact this month. Whether or not draft reforms are accepted by the EU at the February 18/19 summit will have a significant influence on whether UK PM Cameron calls an early June referendum on the UK’s future within the EU. According to the latest UK YouGov poll 42% of those polled want to leave to EU compared with 38% who would vote to stay. Our assumption that EUR/GBP can push back to 0.70 on a 12 mth view assumes that PM Cameron will succeed in his mission of persuading the electorate to vote ‘yes’ to the continued EU membership. An increase in political uncertainty this year has to potential to push EUR/GBP back to the recent high near 0.77 and beyond.” For more information, read our latest forex news.