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Mevyn King surprised and raised the long term inflation forecasts in the BOE Inflation Report. The report also states that GDP is better than reported. This boosts GBP/USD that broke above resistance. Update.

The governor of the BoE, Mervyn King, is usually pessimistic and his actions tend to weaken the British pound. This time is different. Contrary to the usual stance that inflation is fueled by fuel and food, and that it is temporary, the inflation report sees a long term rise in inflation. The two year horizon, long term no matter how you look at it, was raised to almost 2%.

This may sound low in the long term, but it’s significantly higher than the previous long term estimate of 1.6%. This change raises the chances of a rate hike sooner than later.

At the beginning of the week, there was talk that a downgrade of the growth forecasts would hurt the pound. The BOE indeed lowered the growth forecasts, but it wasn’t too bad. Growth is expected to be at around 3%, and there’s also a comment about official GDP figures being too low – this is very good for the pound.

It seems that the market focuses on inflation and improved chances of a rate hike in the near future. This goes hand in hand with the current optimism that replaced the gloomy mood at the end of the previous week and at the beginning of this one.

GBP/USD now trades just under 1.65, approaching the 1.6540 line. Levels above are 1.66 and 1.67. Below we find 1.6430 and 1.63.

Earlier today, the pound made significant gains on various factors. Greece is likely to receive another bailout package. While this may be a temporary solution, the markets like it, and it weakens the dollar across the board. In addition, there are talks that China might actually cut its interest rate, and this also triggers risk appetite, weakening the dollar. All this sent GBP/USD towards the 1.6430 resistance line.

For more levels and upcoming events, see the GBP/USD forecast.