Sterling held above recent lows against the dollar and cut its losses against the euro on Wednesday, drawing support from the Bank of England's latest inflation report which dampened expectations of further monetary stimulus. But gains were limited as BoE Governor Mervyn King said there were downside risks to a UK economic recovery given the tight fiscal conditions at home and weakness in Britain's major trading partners.
The BoE raised its two-year inflation forecast to around 1.8 percent, higher than what most economists had expected. The lower inflation expectations had been keeping alive prospects of it injecting further funds into the economy through its bond-buying program, known as quantitative easing. More QE usually has an adverse impact on the currency.
"That upward revision in inflation forecast has lent some support to sterling," said Richard Driver, currency strategist at Caxton FX. "But after failing to hold convincingly above $1.58 earlier this week, we expect cable to fade lower."
Sterling was flat against the dollar at $1.5675, after edging above $1.5700 when the BoE report was released. The pound had dropped to $1.5644 on Tuesday, its lowest level since January 27, after Moody's put UK's prized triple-A credit rating on review. Traders cited offers at $1.5750 and $1.5770 with major resistance at $1.5921, the 200-day moving average. Against the euro, sterling reversed losses made earlier in the session. The euro was last trading Down 0.3 percent for the day at 83.40 pence, dropping from 84 pence before the inflation report was released.