Pondering The Pound

Yesterday, I read a report from HSBC's economists, via Bloomberg:

HSBC Holdings Plc raised its pound- dollar forecast for the end of 2010, citing the likelihood that the Bank of England will interrupt its asset-buying program next month and raise interest rates before the Federal Reserve.

"We find the idea that the U.K. will raise rates next year but the U.S. will stand pat a very powerful one," the HSBC analysts wrote. "This should be just the event that sees the pound" gain.

Indeed, it would be. But then, this morning I read this news, via Reuters:

Britain's economy shrank more than twice as fast as expected in the second quarter of 2009 to register its biggest annual decline on record, dashing hopes of a speedy recovery from the worst recession in nearly 30 years.

GDP fell 0.8 percent in the three months to June and by 5.6 percent lower on the year, the steepest yearly fall since similar records began in 1955, official data showed on Friday as Britain became the first G7 country to report Q2 data.

The hypothesis may have been that the Bank of England would have raised rates sooner because their economy was doing better as the U.S. economy. Given that most GDP expectations were only half as bad as reality, they might want to rethink that pound-dollar call.

If the hypothesis was that the Bank of England will be more willing to raise rates before its economy improves, then that may help the pound's relative advantage after all. That is, unless raising rates too soon causes the British economy to remain in recession longer than the U.S.