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Yet another perky performance from the pound today, which tops the league amongst major currencies for the year to date. Interestingly, it was Mervyn King’s letter to the Chancellor, rather than the latest inflation figures, which was the major trigger for the pound’s advance.

Guest post by  FxPro

The key passage in the letter was the BOE Governor’s suggestion that inflation was likely to fall back to 2% in two to three years, assuming the base rate was lifted in line with market expectations.

Right now, the front end of the sterling curve is factoring in a little more than 50bp of tightening by year-end, with 25bp likely by May. For many, this suggested that the Governor may have been implicitly accepting the market’s profile for rate hikes, in contrast to the more defiant tone evident in a speech he delivered three weeks ago.

Cable is up at 1.6150 and EUR/GBP has fallen 1% to 0.8365. With the Japanese yen losing ground once again, GBP/JPY has jumped more than 1% to above 135, up from 126 at the end of last year. The pound was one of our favoured currencies for 2011 and so far this expectation is bearing fruit.

Michael Derks, Chief Strategist

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