Last week, for the second time in as many months, the Bank of England (BOE) indicated the pound was too strong at present levels, preparing the currency for further falls against the euro and dollar. The consequences of this for Ireland are considerable.
The first utterance came in late July after the BOE wrongfooted analysts in relation to its quantitative easing (QE) programme, deciding against any further increase of funds for it. The pound promptly rallied, reaching £0.8478 against the euro.
Realising a strengthening pound would scupper any nascent recovery, jangled nerves at the Bank of England prompted the bank to signal the frail UK economy could not wear the pound at such levels.
Last week the pound declined a further 2.7% against the euro when BOE governor Mervyn King hinted the bank might charge depositors rather than pay interest. This policy, also employed by Sweden's Riksbank, was designed to prompt banks to recall funds deposited with them and lend them to UK companies and individuals. The tide began to swell against the currency on this news, finishing the week at £0.9047.
Further momentum on the downside continued to gather, with King last week saying the pound at current levels would certainly help rebalance the economy.
Irish exporters will be one group hit hard by the latest reversal in the pound's fortunes. Exports to the UK make up 17% of all Irish exports globally and the increase in price of 7.6% over a two-month period is likely to nip any talk of 'green shoots' in the bud as the cost of their product is increased in an already price-sensitive market.
When the rate lingered at parity in the first quarter of 2009, the higher costs of Irish exports to the UK, and the relatively cheap cost of imports, is sure to have had a material impact on the 8.4% GDP deficit for that period.
Retailers in Ireland will feel the frontline effects and will be forced to slash prices and margins to compete with goods that are once again cheaper across the border.
It was estimated the total cost to the Irish economy of cross-border shopping last year was €550m and a further loss of €90m tax revenue. This may easily be surpassed in 2009 as the weak pound attracts the Irish shopper to Newry, Enniskillen and Derry.
The fall is not all bad news. It will appeal to investors who can now take advantage of cheaper assets priced in a cheap currency. For example, canny overseas property investors, a relic of the Tiger years, will relish the thought of knockdown prices, up to 50% on peak values, now available on land and property in the UK as a result of falling prices and the latest currency swings. Similar bargains could exist for companies considering an acquisition such as C&C's recent acquisition of Tennant's.
The European Central Bank is sitting on the fence with little power to stem the tide. The single currency is the stronger of the big four currencies (euro, yen, dollar and pound). It is on an 'upward spiral' against the pound as good news continues to flow from the central players in the eurozone, Germany and France, while the abysmal performance of countries including Ireland, Spain and Italy are ignored.
This two-tier eurozone cannot continue to churn out good news forever and following German elections next week, some nasty surprises may emerge to stem the purchase of the euro in favour of the pound.
If this perfect storm for the pound continues, further falls may be imminent and so long as the Bank of England talks down the pound, don't expect a recovery soon.
Niall Haughey is founder director of Blue FX Markets, the specialist currency provider