Forex Flash: UK in focus as it grapples key issues – Deutsche Bank

By FXstreet.com | February 14, 2013 AAA

FXstreet.com (Barcelona) - According to Macro Strategy Analysts J. Reid and C. Tan at Deutsche Bank, "We can't help wondering whether the G-20 summit in Moscow will offer a new dynamic to the ongoing drama across the worlds central banks. One country that is slipping slightly under the radar at the moment is the UK."

Sterling continues to slide (-6.2% and -4.4% against the Euro and Dollar in 2013 and -10.4% vs the Euro since last summer's peak) with yesterday's BoE inflation report not helping. The bank now forecasts that inflation will remain above target for three more years. DB's George Buckley points out that if this is correct it will mean a decade where its overshoots its target for 37 out of 40 quarters. Indeed since the worst global financial crisis in history starting in 2008, UK inflation has now averaged 3.3%. This is perhaps a lesson that if you have control over the printing presses and a flexible currency then inflation is always possible almost regardless of the natural deflationary forces present.

The UK has often been ahead of other countries in this cycle (and not necessarily always in a good way) and it might be the first country to test whether bond investors will tolerate a seemingly weaker inflation anchoring from the central bank. Indeed the continued regulatory demand for fixed income and the prospect of future central bank bond buying might battle it out against fears of constantly higher inflation over the months ahead. This will be a great test case for the rest of the world as to whether financial repression can continue to work in this cycle. "Don't underestimate such a force but it's fair to say that the UK continues to be an economic laboratory for the rest of the world." they add.

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