Forex bites: sterling in the firing line

Another weak UK PMI reading  and another grizzly election result for the British government highlight the pound’s mounting plight. Strong odds of another dip back into recession and rising political uncertainty underline the spreading risks ahead for sterling. It is not helped any by an audible back door whispering campaign from the Bank of England, primarily to help provide a boost UK exports via a more competitive pound. The chips are stacking up against sterling

A likely drop in first quarter UK output should confirm in a few weeks time that the third recession in five years has already begun. Hints from last month’s monetary policy committee, suggest the BOE could opt for more quantitative easing from as early as next week. Given King’s ringing endorsement for new QE, it is only a matter of time before fresh stimulus begins to flow again. And better sooner rather than later. Debt deflation and deepening fiscal austerity are dealing fatal blows to economic confidence. The BOE remains the last line of defence and need to pull a bigger weapon from their armoury. While market expectations are looking for an extra £25bn QE injection, a punchier £50bn may be more appropriate now.

Rising political uncertainty is also making its mark. The Eastleigh by-election result rang some worrying bells for PM Cameron’s Conservative Party. Rising grass-roots support for the euro sceptic UK Independence  Party will be an ominous spur pushing the Conservative Party into a more populist anti-EU slant. That is not good news for the pound in the long run. Question marks about the UK’s long run EU commitment are bound to unsettle overseas firms’ commitment to their own UK operations. A marginalised UK in Europe might pose a serious risk of an exodus of foreign direct investment out of the UK’s shores. Given the deep deficit on UK’s trade account, a threatened outflow of foreign capital would deal the pound a mortal blow.

With the pound poised on a key break below USD1.50 at the moment, the odds are mounting for a bigger break down in sterling sentiment in the weeks ahead. The weak economy, over-easy monetary policy and an uncertain political backdrop could lead the currency back down towards sub-USD1.40 territory quite quickly. The pound will stay down on its luck, with very little looming to pull it back up. Another euro crisis will make little difference for the pound as a safe haven play as it will probably suffer in tandem just by geo-political association.