Just A Matter Of Time Before The Pound Falls. By Nicholas Hastings

Fast or slow, the pound is on its way down.

Economic data this week will dictate the pace of the decline.

Better-than-expected numbers on the U.K. may well postpone the day of reckoning.

But worse-than-expected ones will confirm what many now believe - that the Bank of England made a policy mistake in not extending its quantitative easing last week.

The bank's move - or lack of it - appears to have already pushed mortgage costs higher and put the country's nascent recovery in jeopardy.

As strategists at Citigroup point out: "The negative impact of poor cyclical indicators is likely to have a more pronounced effect on sterling than the supportive effect of the rise in rates."

But perhaps of more lasting damage to the pound is the government's lack of fiscal maneuverability. The BOE can at least rectify its monetary error by increasing its asset purchases, as originally expected, at its policy meeting next month.

The government has no such option.

As the International Monetary Fund recently reported, the U.K. is the only developed country with no fiscal ammunition left if its economy falls back into recession next year.

If that is the case, a weak pound will no longer be an option for the U.K. authorities, it will become an imperative.

There is already evidence that a weak currency may be needed to attract the foreign interest that is needed to fund the budget deficit. Marshall Gittler, chief international strategist with Deutsche Bank Private Wealth Management in Geneva, noted that foreigners have been net sellers of gilts for the last three months.

"Either yields may have to rise or the currency depreciate to attract money back," he said, noting that an overvalued currency and stubbornly high inflation will make it difficult to sell gilts just as the budget deficit soars.

Add to this the government's very low standing in popularity polls and its failure to detail its spending plans and investor confidence in the U.K. is only likely to decline further.

Although house price data earlier in the day showed a continued improvement, with the RICS index up at -18.1 from -43.8, housing bulls will still be disappointed in the long term as this trend proves unsustainable. With the number of unemployed still rising, forced selling will increase and prices will fall back again.

For sterling, the big question now is whether the currency falls back sharply or enters a more gradual decline that could take it back down closer to $1.50 before long.

Early Tuesday, risk appetite was on the rise again as expectations of good results from Goldman Sachs and perhaps other U.S. financials lifted equity prices across the globe. Both the Dow Jones Industrial Average and the Nikkei posted 2.3% gains as the pound rallied to $1.6261 by 0645 GMT from $1.6231 late Monday in New York, according to EBS.

The dollar was able to push up to Y93.14 from Y92.95, helped also by fears that the Bank of Japan will intervene if the yen continues to strengthen much past Y90 to the dollar.

The euro was nearly flat at $1.3991 from $1.3994 but was up at Y130.38 from Y130.08.