The Pound's Problem Is Just Economics Now. By Nicholas Hastings

Political uncertainty was blocking the pound before.

Now, it's just sheer economics.

Instead of bouncing after the Conservatives formed a coalition with the Liberal Democrats a month ago, sterling has remained weak against the dollar.

For months, the U.K. currency had been suffering because of political uncertainty ahead of the May 6 general election. From last November, it declined steadily from nearly $1.6900 all the way down to under $1.4300 as investors worried whether a new government would pursue adequate fiscal tightening to prevent U.K. debt from being downgraded.

See the pound's steady decline against the dollar:

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Although the Conservatives' failure to win an outright majority initially added to the pound's woes, the coalition has so far proved successful, with the new administration under Prime Minister David Cameron launching into an immediate program of aggressive spending cuts.

Details of the program and the impact on the deficit will be outlined in an emergency budget on June 22.

Nevertheless, sterling investors, apart from those anxious to move out of the euro, have shown little enthusiasm and the pound has only made it back up to around $1.4700.

Of course, some of this could be associated with the fears about just how much U.K. growth will suffer from the cuts.

But, according to Simon Derrick, a senior currency strategist with Bank of New York Mellon in London, it also has very much to do with the fact that the U.K.'s own fiscal tightening will coincide with similar policy shifts across the euro zone.

"It should be clear to all that the fortunes of the U.K. economy cannot be divorced from those of its neighbours on the continent," Derrick said, pointing out that 40% of U.K. exports go to the euro zone while the collapsing southern European property markets have been a major magnet for U.K. investors in recent years.

The problem was that just as the U.K.'s political problems were about to be resolved in the favor of the pound, another lurch in the euro-zone sovereign debt crisis meant that governments across the region were having to pledge austerity programs that might keep credit markets happy but will slash their prospects for economic growth.

Although the ongoing fears of a sovereign default, which late last week appeared to be spreading outside the euro zone to eastern Europe, are ensuring that the pound continues to rise against the euro, hopes of some significant rebound against the dollar are fading fast.

In fact, with recent U.S. data showing improvement and with more Fed officials calling for higher U.S. rates, chances are that the pound will remain soft against its U.S. counterpart and even start falling again.

As Derrick said: "There is a very clear risk that the U.K. could hit some major economic headwinds over the next few years. With the U.K. gilts market already starting to reflect this fact (given the dramatic collapse in yields seen since the start of May), it seems reasonable to believe that investors are already starting to factor this in. In the circumstances, we suspect that this bodes ill for the pound in the months ahead."

Early Monday in Europe, the pound was a little lower as market sentiment remained poor. Disappointment over last Friday's U.S. employment numbers and falling stock markets across Asia are encouraging further moves into safe havens.

The pound fell to $1.4430 by 0645 GMT from $1.4467 late Friday in New York, according to EBS.

The euro was down at $1.1943 from $1.1962 even though the new Hungarian government tried to reassure markets over the weekend that it will meet its deficit reduction target and doesn't face problems like Greece.

The euro should also get some support from Iran's denial that it had stopped buying the single currency for its reserves. The euro had been hit last week by reports that the Iranian central bank preferred to buy dollars and gold.

The euro was also down at Y109.32 from Y109.56, while the dollar fell to Y91.49 from Y91.60.