Changes in forecasts shown in Bank of England Inflation Report

Yesterday's Bank of England Inflation Report saw some changes in forecasts, with a stronger outlook for inflation and a marginally weaker outlook for growth. Mervyn King, the Governor of the Bank of England, did his best to downplay the risk posed by increasing inflation, reiterating his determination to look past short-term price shocks (gas prices for example are expected to keep the inflation rate higher for longer).

As for the weaker growth forecast, the overall view is still fairly optimistic and, according some economists, over-optimistic. The tone of the yesterday's inflation report favours interest rates being held at current levels for a prolonged period. The optimistic tone assisted Sterling, pushing higher against the US Dollar and Euro on the foreign currency exchange market.

The G20 meeting in Seoul starts today so you would have been forgiven for thinking that discussion will focus on the US Federal Reserve's actions to expand QE however, events in European and US bond markets will probably top the bill.

In Europe surging bond yields in the peripheral countries (such as Ireland, Spain and Greece) saw the single currency come under renewed pressure as investors became concerned about the possibility of debt restructurings, a disappointing Portuguese bond auction, and budget problems in Ireland.

Sterling has been able to gain ground on the Euro this week, taking back 2.5 cents from 1.15 to touch 1.1750 yesterday.

It is Veteran's Day holiday in the US today, which may mean volumes are lighter in European trading and with no important data releases the markets will lookf towards to Q3 GDP figures from the Eurozone, released on Friday. In the build up to the GDP number, the Euro may come in for more pressure as bond spreads widen further.