Sterling set to challenge the Dollar in a race to the bottom

By this time tomorrow, we will all know the extent on the Public Sector cuts in the UK. However, from a currency perspective, HiFX believe the release of the Bank of England minutes from their October meeting are likely to be far more influential.

Jason Gaywood, Senior FX Consultant at HiFX comments "For over a year now, the Monetary Policy Committee has ‘sat on it's hands' by leaving Interest Rates on hold and sustaining Quantitative Easing at £200 billion. My suspicion is that tomorrows minutes will give the clearest indication yet that the fence sitting is soon to be over as the MPC broadcast their intention to increase the availability of QE by perhaps as much as another £100 billion as early as the first quarter of 2011.

"If this is the case, the UK will be closely following the example of the US where last week Ben Bernanke, the chairman of the US Federal Reserve, signalled the imminent launch of another vast QE package there of up to $1trillion (£625 billion).

To date, Sterling has very much been piggy in the middle - strengthening against the Greenback, but weakening against the Euro. Over the last two months, Sterling has weakened by as much as 8% against the Euro yet its relative strength against the USD has gone up by 4.5% over the same period. This may all be set to end if further stimulus is on the way in the UK.

Against that backdrop, the Pound may well find itself squeezed even further by the currently mighty Euro and simultaneously have its wings clipped against the Dollar as the Market digests the fact that we are following closely on the heels of the US in terms of falling growth and the prospect of the dreaded ‘double dip' as we head into Winter.

Sterling has already faltered against the USD as we approach the important psychological 1.6000 area and continues to look vulnerable against the Euro as we drift below 1.1400 (87.8 pence).

It would appear that the GBP is likely to face a tough time in the coming months but for importers and holidaymakers alike, the USD is likely to be the lesser of two evils when compared with the cost of purchases using the Euro.