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This year of 2010 did not start for the economy of UK as good as expected. First the recession, which is still strongly showing its appearance in the financial world, the latest concerns of the sterling crisis are being completed by the idea of a hung parliament based on the latest polls. Fearing from a result of political deadlock and insufficient response to the deficit currency markets did not appreciate the idea of a hung parliament.

Because of the current situation presented in the weakness of the sterling, the biggest fear of the Bank of England and the Treasury is turning into a route which would drive to interest rates and inflation raise. One major cause of the current sterling crisis is the previous overvaluation of the currency. There has been a strong and massive capital inflow in the UK during the boom years of credit bubble, which has been keeping the sterling stronger than necessary.

This action caused more damage leading to the sterling crisis than expected: people became more confident, travelling abroad while feeling richer; it also depressed inflation in an artificial way, meaning that the interest rates might be lower than otherwise. These overvaluations of the currency also lead to the further deterioration of the not so bright impaired industrial competitiveness’ situation.

After the drop of the sterling policy makers adopted a relaxed view over the happenings. All that has happened was the drop of the sterling to the normal level which has been identified by academic studies as fair value against the leading currencies and Euro. But now the situation has to be evaluated differently, things are getting serious; markets are beginning to doubt that Britain is able to resolve its fiscal deficit. The Treasury is in despair of assuring the City about the detailed and credible plans about tackling the deficit.