By Jonathan Watson

Sterling has had a very bad week losing well over 2% against many of the major currencies. Why is this? Well a poor run of data has shown the UK’s recovery to be questionable and moreover the UK’s monetary policy to be uncertain. The UK has rising unemployment and rising inflation. This can cause a policy dilemna as the measures to combat each of these problems are at loggerheads. Let me explain why.

Unemployment is typcially a result of a lack of growth. The cure is to rejuvenate the economy, for example quantitative easing. But this will lead to the cost of goods and services increasing as there is more money in the money cycle leading to inflation. To combat inflation we typcially raise interest rates although this has the effect of curbing spending and reducing growth, which will in turn hamper efforts to control unemployment.

We can see the policy dilmena on the horizon for the MPC and this is why I feel there is extra pressure on the pound at present and why I would expect this to continue into 2011 until interest rate rises are more seriously considered.

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