From the start of the crisis, Sterling has lost 25% of its trade-weighted value. Various factors such as investor apprehension, rising debt levels, frailty in the banking sector, weak fiscal policies and a heavy dependence on global capital inflows have increased the risk of holding Sterling.

Investor confidence is fluctuating, we have seen sharp sell-offs in March and there has been uncertainty of the UK government in the run up to the election.

In addition to this, The Commodity Futures Trading Commission have become more bearish than ever on Sterling. Medium term inflation problems, along with concerns on the fiscal health of the UK will filter down to investors who will be reluctant to hold sterling assets.

The new Tory and Lib Dem coalition government have vowed to reduce the UK’s deficit in 2010 which is said to be around 11%. The new government seems to be working together in the UK’s best interests with regards to reducing the deficit. We should see some better economic data in H2 of 2010 which should strengthen Sterling against the US Dollar. So although Sterling is seeing some headwind in the short term we should see it strengthen  to 1.60 against the USD.