The market heard a dovish Bank of England today and sent sterling down by around than one  percent.  Initially sterling had reached its highest level since the US election; extending its recent rally a little  through $1.27, but  has now reversed lower.  A close below yesterday’s low ($1.2540) would be a potential key  reversal. We had  identified several technical signals that had suggested potential toward $1.28. Trend line and  technical support are found  between $1.2490 and $1.2525. A break could signal a move toward $1.2400-$1.2430  initially, and maybe  $1.2260, if/when the US dollar rally resumes. 

 It is difficult to identify the dovish impulse.  It is possible the many participants had expected a more hawkish  message, Yet it revised up growth, warned that inflation would likely overshoot its 2% target on a two -year  outlook.  It completed its Gilt purchases but have a few billion more of corporate bonds to buy to reach its GBP10  bln target, but is running well ahead of schedule.  

 The growth forecast for this year was lifted substantially: from 1.4% to 2%. Growth is expected to slow to  1.6% in 2018 and 1.7% in 2019.  Inflation is expected to be 2.6% in two -year and peak near 2.8% in  H1 18. The  dovish tint to the growth forecast that has implications for inflation expectations comes from the BOE discovering  spare capacity in the UK economy. 

 The slack is in the labor market.  Unemployment, the Bank of England now says, can fall to 4.5%. Previously 5% was thought to be full employment. For policymakers, this means that the economy growth may not be  inflationary. In turn, that means that the projected increase in inflation may not be so worrisome and more transitory, having to do with sterling’s past slide and the recovery in oil prices. Later this year, large parts of the fall in  sterling and the increase in oil prices will drop out of the comparisons (base effect).