Currency Watch: A week to forget for the pound

Sterling has come in for an absolute pasting in the past two weeks and is the worst performing currency in the G10 so far in 2013.

This is because everyone knows that UK growth is likely to be poor throughout 2013, while the government’s deficit reduction is not hitting its self-assigned targets. The remedy for the growth problem will involve further injections of QE from the Bank of England, although recent current account deficit figures suggest that the manufacturing/export turnaround is further away than ever.

Add in the political pressure of an almost certain ratings downgrade and the uncertainty around the UK’s place within the EU and it’s easy to wonder why GBP hasn’t fallen more. We do expect the Bank of England to expand its QE program in 2013 taking the total amount purchased from its current level of £375bn towards £500bn by the end of the year.

The minutes of the latest meeting did not explicitly call for further action but did note that business surveys pointed to little more than output subsistence in the latter part of last year. A continuation of those conditions alongside the paucity of consumer confidence, regardless of a spike in inflation, would see further loosening of monetary policy.

Add in the political pressure of an almost certain ratings downgrade, and the on-going doubt surrounding the UK’s place within the EU, and it’s easy to wonder why the pound hasn’t fallen more. The UK has looked less and less like a viable “safe haven” from the Eurozone crisis to investors, and this has also hurt sterling.

While this should be a positive for exporters the Chancellor’s plan to retool the UK economy via “a march of the makers” has failed spectacularly despite the support of a central bank that has been in the business of weakening its currency for the best part of 4 years – a turnaround is no more likely than it ever has been.

Sterling should rebound though. Q4 was poor in both the UK and Eurozone although we assess the UK to have been a better growth opportunity through 2013 as a whole. Once this becomes clear in the data sterling should begin to recover. The short-term weakness is also a lot to do with “one-off” factors for the UK (credit rating downgrade, EU uncertainty) and given we expect these to be behind us within a month, we further expect GBP strength. Eurozone debt issues will come back as the Spanish funding position becomes increasingly tenuous and so haven desire for GBP should increase.

Jeremy Cook is chief economist at World First foreign exchange.