Sterling has been the currency to watch for 2013 not yen. With an 8 percent decline to below $1.50, sterling is taking a pounding. The fundamental suggests that this trend can continue. The UK economy is set to take a triple dip since the Great Recession of 2008. More importantly, this recession fear has caused expectations for more monetary easing to rise. The MPC was mixed in their last vote 6-3 with maintaining policy. Outgoing governor Mervyn King has been one of the MPC arguing for more bond buying. The shift to easing is close and the new Governor seems to be signalling that he will use the means necessary to get the economy going.
The BoE has admitted that inflation is likely to stay above the 2% target for at least two years. Since tightening is not in the cards, the currency is going to move lower. The BoE has not been able to hit the 2% inflation target since before 2008 so simple currency arithmetic suggests a decline. The BoE has limited creditability as an inflation fighter. This is what we may expect form other QE followers. The rest of the G10 has not followed the inflation path of the UK. The fear is that this may turn into a financial spiral of lower bond prices and currency and the BoE being the buyer of last resort of UK paper.
Some are arguing that the current situation is part of a policy of nominal GDP targeting and an effort to improve exports. The sterling fall in not some competitive policy for devaluation. It is the result of not hitting targets, a poor economy, and strong QE.
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