By Nick Beecroft, Senior FX Consultant

Sterling has sailed into a Perfect Storm of negativity. Not only is it assailed by political uncertainty as the Conservative Party poll lead evaporates, raising the ugly spectre of a 'hung' Parliament, with Labour forming the largest party, but it also has to contend with Prudential's monster $35bn acquisition of AIG's Asia operation, AIA.

How much foreign exchange selling of sterling to raise these dollars will this deal imply?

A rights issue on the London Stock Exchange will raise Sterling proceeds, as will the eventual sale of the Pru stock given to AIG. The prospect of orders to sell the equivalent, £23bn, is hanging over the market.

Another threat to Sterling comes in the shape of this week's BOE MPC meeting. Several members, including Governor King, have remained steadfastly bearish on the economy's prospects and have kept the option of rejuvenating the BOE's QE programme on the table. Cranking up the printing presses would accelerate the pound's collapse, but the market is coming to suspect that this is the plan-given the unavoidably tight fiscal stance that any incoming government will be forced to adopt, maybe the powers-that-be are adopting the classic solution to a debt mountain, devaluation, spurred on by an ultra loose monetary policy. Tight fiscal, loose monetary-the traditional death-knell for any currency.

Finally, and maybe most importantly over the medium-term, is the global Sovereign debt problem. In 2009, the West seemed to have 'got out of jail free' in some senses- the private debt problems which drove the banking system to the edge of destruction were replaced with government debt. This neat arrangement is now being shown for what it is-a Chimera. The problem wasn't solved, it was merely passed into another accounting entry, and now the markets are waking up to this, as displayed by their fears over Greece. The UK, with similar debt profiles, could be next in line.

Just to round off the grim backdrop, we are starting to see economic releases in the US, the Eurozone and the UK suggesting that economic recovery is slowing-raising fears of 'double-dips', with all the attendant, unwelcome drops in tax revenues that would accompany reduced activity.

Is there any wonder that investors are turning to the world's perceived least worst currency, the only true reserve currency, the USD? This is what happened in Q4 2008, as the financial system teetered on the brink, this is what will happen in 2010 as we enter this new, frightening phase of the crisis.

Nick Beecroft

Senior FX Consultant

An Honours Graduate from Oxford University, Nick Beecroft brings over 25 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee. Nick also contributes to contributor to Saxo Bank’s Tradingfloor website and relishes regular dialogue on the markets with clients at industry gatherings, such as awards dinners and conferences, at which he has in the past spoken.

About Saxo Bank

Saxo Bank is an online trading and investment specialist, enabling clients to trade Forex, CFDs, Stocks, Futures, Options and other derivatives, as well as providing portfolio management via SaxoWebTrader and SaxoTrader, the leading online trading platforms. SaxoTrader is available directly through Saxo Bank or through one of the Bank’s global partners. White label is a significant business area for Saxo Bank, and involves customised and branding the Bank’s online trading platform for other financial institutions and brokers. Saxo Bank has more than 100 white label partners and boasts thousands of clients in over 180 countries. Saxo Bank is headquartered in Copenhagen with offices in Australia, China, the Czech Republic, France, Greece, Italy, Japan, the Netherlands, Singapore, Spain, Switzerland, UK, and the United Arab Emirates.

source: