Concerns about the MPC’s commitment to its inflation target, weakening expectations for UK GDP growth relative to elsewhere and the loss of the triple-A credit rating have all weakened the pound since the start of year. A further fall is clearly possible, but there are in fact reasons to think that sterling might strengthen again soon. In our view, inflation is likely to fall eventually to a lower rate than investors expect, the UK economy should recover before the euro-zone and markets may soon reassess the creditworthiness of peripheral euro-zone governments.
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