February 23, 2013 (TSR) – Great Britain pound has fallen by the sharpest pace in the past three years since the beginning of this year, with the downward move gathering pace this week.
The pound has declined by 5 percent since early this year to 1.525 against the U.S. dollar, approaching the lowest level since January 2010.
FACTORS BEHIND DEPRECIATION
Expectation for the central bank of Britain to further loosen the monetary policy soon has sent the pound sinking quickly.
Bank of England’s monetary meeting minutes released on Wednesday showed the Governor Mervyn King has joined two other colleagues voting to increase quantitative easing by another 25 billion pounds, to 400 billion pounds.
Although the suggestion was opposed by the other six members on the Monetary Policy Committee, it has made further QE stimulus more likely in the near future.
The minutes also showed that the Bank was considering to further cut the interest rate from the current historical record low of 0.5 percent.
Appreciation of the U.S. dollar after the Federal Reserve hinted about a premature end to the U.S. QE programs has added pressure to the pound.
Minutes of the Fed’s last meeting showed that in January, some Fed officials were concerned about the “efficacy, costs, and risks of asset purchases,” saying that the bond-buying programs could push up inflation or could “foster market behaviour that could undermine financial stability.”
This has aroused market concern that the Fed could scale back the QE program sooner than expected.
Also weighing on the downward move of the pound was the risks for Britain to get a sovereign debt downgrade.
“Since the beginning of the year, we have been saying that one of the greatest risks for the UK is a sovereign debt downgrade and it appears that this notion is gaining traction in the markets,” Kathy Lien from the Daily FX said.
POSSIBLE FURTHER DROP
Some analysts expect the pound to fall further this year, with the rising possibility for Britain’s monetary policy to be loosened this year and sovereign debt rating to be downgraded.
Economists pointed out that it would still be difficult for Britain to meet its borrowing target this year.
For the financial year to date, Britain’s public sector net borrowing, excluding financial interventions, stands at 93.8 billion pounds, which is 1.5 billion pounds higher than at the same point a year earlier.
Rumors have come that Standard & Poor’s may downgrade the British sovereign debt. The ratings agency affirmed Britain’s AAA status but revised the outlook to negative last December, which means it is more likely to cut Britain’s rating now than before.
HSBC research team said in Thursday’s report that the GBP-USD is likely to fall to 1.48 and EUR-GBP may rise to 0.91 by the end of this year.
“GBP is still slightly ‘overvalued’ on conventional measures. There seems little prospect of official resistance to further weakness given the fiscal austerity and the limited room for manoeuvre on monetary policy, so further weakness may even be welcomed,” the HSBC report said.
HSBC underlined the recent drop in pound is “small” in a historical context. The pound plunged 30 percent between mid 2007 and early 2009.
Daily FX also forecast the downward trend to continue, as “there is no support for GBP-USD until 1.50.”
Source: Xinhua
