I have been very bearish about the British Pound for the past two years, and I am currently short the GBP vs the EUR, which turned out to be quite a profitable trade, I was rethinking my position a couple of days ago.
There are a few things to take into consideration:
The UK was the most debt-addicted country on the planet, worse than the US. So when the credit contraction begins, it will be highly deflationary (and hence bullish for the GBP)
Let's not forget that the even when BoE rates were at 5.75% people were borrowing like crazy and banks pushing ARM interest only mortgages to unbelievable levels, so the British are probably more addicted to debt than any other people I have heard of. This is inflationary and bearish for the GBP.
Interest rates have dropped from 5.75% to 0.50% and are unlikely to rise for the foreseeable future. This is inflationary, at least in the short term, for as long as the debt addicted people can keep on borrowing. This is inflationary and bearish for the GBP.
Mervyn King and Alistair Darling are probably bigger fools than Bernanke and Obama, the deficits are huge, even compared to the US ones, and recently, Mervyn King tried to print £200 billion... This is inflationary and bearish for the GBP.
The GBP has already lost about 25% to 30% of its value against the Euro and the Dollar (paper currencies...), I'm unsure about how much it can drop in the short term (on the long run, paper currencies fall to their intrinsic value: zero). So we might have hit the bottom or be close to hitting it — at least in the short term. This is then bullish for the GBP.
Lots of mainstream papers have started to print article about a collapse of the Pound below the Euro. This is, on the short term, a contrarian signal that the GBP is about to hit bottom and is hence a bullish news for the GBP.
A study by Unbiased.co.uk (I don't know them, so don't know if the results are trustworthy or not) shows that borrowing has been increasing again in the UK. This is inflationary and bearish for the GBP in the short term. But it also means that the Brits are struggling to pay their everyday expsenses and the default rate is going to rise once everybody has loaded their credit card with the 12 months interest-free loans credit card companies are promoting.
Conclusion: All in all, I think the GBP is likely to decline on the very short term (next few weeks maybe) before rebounding. I am hence keeping an eye on it and will look for an exit of my position if GBP/EUR gets close to 1.00 or manages to break that floor.