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Sterling is understandably nervous today because one of the main pillars upon which recent strength has been built could well be undermined.

Back in August, newBoE governor Carney announced a policy of forward guidance, linking low rates to a continuation of the unemployment rate above the 7.0% level. That level has been nearly reached in the space of 6 months, rather than the 3 years the BoE initially anticipated.

But the Bank are not thinking that this means a rate hike is imminent and the noises we’ve heard from them ahead of today’s key Inflation Report suggest that the Bank is going to revise and soften its forward guidance policy, rather than prepare the market for an imminent rate hike.

Update:  Carney Enhances Forward Guidance – GBP/USD jumps

Sterling has been the strongest performer on the majors since the policy was announced, helped by better than expected data on the underlying economy, but a stronger pound is not going to support the Bank’s aim of re-balancing the economy towards export growth. Sterling could well feel deflated today and is already waning in early European trade.

As for the dollar, the message from new Fed Chair Yellen yesterday was business as usual from the Fed, with no signs that she wants to depart from the approach of her predecessor Bernanke. The dollar was initially volatile, but is overall little changed after her testimony yesterday, which also provided some support to stocks. Note that ECB President Draghi is due to speak later today at 15:30 GMT. Overnight, we’ve seen better trade data from China and also further strength in the Aussie, which has pushed above the 0.9050 level and stands nearly 5% higher from the lows seen towards the end of January.

Further reading:

Carney Enhances Forward Guidance – GBP/USD jumps

Seeking longs on JPY crosses as stocks rally