The pound took a fresh beating yesterday as the prediction of a German economic resurgence triggered a sterling sell-off and experts said the currency was at risk of a "large-scale devaluation".
Sterling trails only Japan's yen as the worst performer against a basket of international currencies this year as a 4.5 per cent decline fuels import prices and pushes up the cost of holidays for hundreds of thousands of households.
But bullish forecasts from the Bundesbank over an immediate return to growth for Germany, after a worse-than-expected 0.6 per cent slide between October and December, put sterling on the back foot again yesterday as it sank close to 15-month lows against the euro.
In another day of turbulence in international currency markets, the euro gained 0.3 per cent against sterling at 86.3p, within sight of its 15-month high of 87.2p hit earlier this month. Against the dollar, the pound took more pain, slipping to a seven-month low of $1.5438 at one point before recovering slightly.
The Bundesbank's February report said Germany's economy would resume growth in the current quarter, with activity "gradually picking up pace in the remainder of the year". Investment bank UBS forecast sterling is likely to be the next major currency that depreciates strongly.
Head of foreign exchange strategy Mansoor Mohi-uddin said: "As central banks tolerate higher levels of inflation, the pound is set to weaken further across the board particularly against our favourite G4 currency, the US dollar. The pound seems clearly at risk of following the yen and suffering the next large-scale devaluation."
The bank has recommended clients buy options allowing them to sell the pound at $1.48 in six months' time, making them profits if the pound falls even further below that level.
Dealers also noted weekend comments from Bank of England rate-setter Martin Weale, who warned the pound was still too high to help the UK economy rebalance effectively. The continued pressure on the currency comes after its biggest weekly loss since June last year amid gloom over weak growth prospects. The Bank of England has signalled it is willing to tolerate higher inflation for longer, while the pound's safe-haven appeal has also waned as the European Central Bank makes explicit commitments to prop up eurozone strugglers and preserve the single currency.
The yen also fell as the G20's finance ministers in Moscow shied away from criticism of Japan for weakening its currency. Prime minister Shinzo Abe has repeatedly called for a cheaper currency in order to help the country's exporters compete.