UPDATE ON £ FORECAST ON 27/08/08

As Niels Bohr said "Prediction is very difficult, especially about the future".   So as soon as I had made a straight line projection in May 2008 that suggested that the £ would fall to parity with the € by April 2009... it stopped falling!   However, as on today (28th September 2008) it has just fallen through a key resistance level and looks as if it may resume its decline.

And though the £ held steady against both the € and $ between April and July, since July it has declined substantially against the $ from $1.95-2.00 in July to $1.83.   Though the timing of our specific forecast of £-€ may be delayed, we believe that our view that the £ will decline sharply will prove correct.   .  

We believe that the £'s temporary respite in early summer of 2008 was only thanks to UK interest rates being higher than both those in the USA and the Eurozone.   As this puts relatively more recessionary pressure on the UK economy, this should result in the Bank of England having the unfortunate choice between a relatively worse recession in the UK than in the US (or even possibly than in the Eurozone), or a weaker currency and worse inflation.   It's like trying to squash a balloon.   If you squeeze in one place the stress pops out in another.   If the Bank tries to hold down inflation and hold up the currency the recession will be worse.   If they try to ameliorate the recession, inflation will rise and the currency fall.

There was an interesting article by John Plender in the FT of 27/08/08 where he says of the UK...

"Unlike the US it [the UK] does not borrow mainly in its own currency.   And its overseas income is already on a sharply declining trend.

The worst of it for the British is that their external assets and liabilities are close to 500% of GDP, compared with just over 100% for the US.   From being banker to the world, Britain has, by common consent, become the world's most highly leveraged hedge fund.   The message for sterling is painfully obvious."