The BoE and inflation

GBP/USD has hit a 'new' 4-week high in the wake of the BoE meeting
that left the base rate and QE totals unchanged, as expected. Whether
the vote count changed from the 7-1-1 split that has been the result
of the last 2 meetings won't be known until minutes are released on
26th January.

However, while today's meeting was a non-event, there
has been a *dramatic shift* in BoE rate hike expectations over the
last month. Evidence has mounted that the persistently high price
pressures in the UK are fuelling inflation expectations. This boosted
the sterling rate differentials across the board. Figure 1 plots a
proxy for inflation expectations - the rate implied by the UK 5-year
inflation swap - against the GBP-USD 2-year swap rate differential.

The 2 series have been on the rise in sync since the end of 2010, with
their leg higher gaining momentum most recently. Growing GBP rate
advantage in turn pushed GBP higher against USD, EUR and, most
recently, AUD.

Source: Fxstreet.com