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Sterling Takes 'Absolute Pasting' as Troubles Mount

The U.K. pound has come under increasing pressure in the last few weeks as the outlook for growth in the country looks sluggish, but the currency could fall even more as the economy faces multiple problems.

Doug Armand | Photographer's Choice | Getty Images

It's widely predicted that fourth-quarter GDP (gross domestic product) will once again tip into negative territory, potentially triggering a downgrade for the U.K.'s triple-A rating.

Such a rating cut would cause real pain for Sterling, as investors opt instead for the dollar and the euro, David Bloom, global head of foreign exchange strategy at HSBC told CNBC.

"What I'm really worried about next year is that the U.K. will look the ugliest out of the three ugly sisters," he told CNBC in December, referring to the dollar, euro and the pound.

(Read More: Sterling to 'Lose Contest of Uglies': HSBC)

But this pressure has already started as bond spreads have narrowed between Europe's periphery and safe havens like the U.K., and as investors have returned to countries such as Spain and Italy.

Prime Minister David Cameron has also increased concerns, promising a relook at the U.K.'s involvement in the European Union. He was due to give a speech on Friday on the issue, but that was cancelled due to the situation in Algeria.

"Press reports of what he will say and the reaction of business underline that this is an issue that has potential to be GBP negative unless he changes course," currency strategists at Lloyds said in a research note.

(Read More: Prime Minister Ready to Stake Britain's European Role on a Referendum)

Retail sales have also been a focus, as data released on Friday showed sales in December (including fuel) fell by 0.1 percent month-on-month against a forecast of a 0.2 percent increase.

Sterling fell to an 8-week low against the dollar following the announcement of that data.

(Read More: Will 2013 Be the UK's 'Groundhog Year'?)

Even before the retail data was released, investors prepared for bad news.

"Sterling came in for an absolute pasting yesterday as investors positioned themselves for today's retail sales numbers," FX company World First said in a morning note.

"Add in the political pressure of an almost certain ratings downgrade and the uncertainty around the U.K.'s place within the EU and it's easy to wonder why GBP hasn't fallen more."

Despite this, World First do not foresee a collapse in the currency, and give a short term target for the pound of 1.19 euros, and 1.59 dollars.

By CNBC's Matt Clinch