The underlying UK current account deficit in the region of3 percent of GDP is a source of medium-term concern. The U.S. economy is, however, also vulnerable because of high debt levels and a wide current account deficit (the 2005 shortfall is likely to be at least 6 percent of GDP).

In this environment, the pound should be cushioned from a sharp decline against the U.S. currency, particularly with central banks unwilling to increase dollar reserve levels further. Overall, the similarity of fundamentals between the U.S. and UK should help limit substantial pound/dollar moves, although they cannot be ruled out.