The prospect of further quantitative easing in the US and the UK has been weighing heavily on both the dollar and sterling of late.

The recovery of the world's largest economy showed signs of running out of steam in the second quarter and forecasts for GDP next year are currently being revised down.

The UK recorded its fastest pace of growth for nine years in the second quarter although recent data suggests this is not to last.

The markets have become unsettled as quantitative easing - in both talk and practice - becomes increasingly commonplace. Analysts at Commerzbank argue that it 'no longer remains a tool reserved to fight a systemic crisis'.

Market rumours now suggest that the Fed could start its second round of asset purchasing by November.

Philip Ryan of Currencies Direct said: 'The weaker than expected level for US consumer confidence in September published on Tuesday has only supported this feeling as sentiment continues to be hit by job market concerns. Consequently, the dollar remains under pressure, with little sign of stopping.'

So why more quantitative easing?

Quantitative easing works in a number of ways to help lift GDP. It can lower borrowing costs by reducing the yields on government bonds, boost asset prices and increase bank reserves to make lending easier.

It can also stabilise or raise inflation expectations.

Tim Drayson, an economist at Legal & General Investment Management, said this is likely to be the justification for additional quantitative easing in the US.

'The Fed might have to prove its anti-deflation credibility with a further round of quantitative easing. The difficulty is calibrating the amount. Too little could lead to a loss of confidence in the Fed's ability to stimulate growth. The Fed would then be forced to expand quantitative easing on a massive scale in the next round to influence expectations.'

However, analysts at Commerzbank added that fears are mounting that quantitative easing could create future inflation risks which the Fed will be unable to control. 'The success of the measures will only become obvious late. Until then, the risks dominate. And that means that until then the prospect of quantitative easing 2.0 is putting pressure on the dollar.'

The anti-dollar sentiment is currently benefiting the euro, as investor confidence in the region grows.

The countries which were previously in the spotlight over their public finances - Greece, Italy, Portugal, and even Ireland - have received good demand at their respective debt auctions, suggesting that confidence is recovering from its record lows.

Simon Denham, chief executive of Capital Spreads, said: 'At some point we can probably expect a statement from an ECB member sometime later this week or next stating that the eurozone is pondering more rescue/stimulation packages in an attempt to reverse the recent Euro strength.'

What's going on with sterling?

Sterling has also come under pressure as the Bank of England looks like it could extend its £200 billion quantitative easing programme which finished in February.

The latest official figures show that underlying broad money growth remains sluggish with the annual growth rate slowed from 2.3 per cent to 1.9 per cent.

Vicky Redwood, senior UK economist at Capital Economics, said: 'Underlying broad money growth still looks very weak - supporting Monetary Policy Committee (MPC) member Adam Posen's view that more quantitative easing will be required in order to boost money and credit growth and hence support overall economic activity.'

Yesterday, Posen said the Bank of England should start pumping more money into the economy to avoid copying Japan in the 1990s and falling into a slump. He takes the view that UK monetary policy should continue to be aggressive about promoting recovery and that policymakers should not settle for weak growth out of misplaced fear of inflation.

This all nods to the need for further quantitative easing.

Andrew Scott from currency specialists HiFX said: 'These are some of the most explicit comments we've had from any member of the Bank's committee in favour of the Central Bank providing additional stimulus. This may come as a surprise to some, as the economy is still growing.

'We are still some way from this view being shared amongst a majority of MPC members, which would be needed for the easing to be approved. Nevertheless, after last week's central bank comments, traders are very focused on quantitative easing, whether here in the UK or in the States'.

Posen's views may have been tempered by the hawkish Andrew Sentance who has repeatedly called for interest rates to rise from their record lows and says no further quantitative easing is needed, but the pound still dropped sharply after his comments.

Duncan Higgins, senior analyst at Caxton FX, commented: 'Quantitative easing is not a phrase that traditionally sits well with the pound and, with the door very much open to the possibility, sterling may struggle to regain its poise in the short term.'

Capital Spreads said that, although Cable – the $/£ rate – is being pushed around by comment, the supports at $1.5770 and $1.5725 look solid for the moment'.

Over the longer term, Higgins said that sterling should get some support from eurozone troubles, with Spain's credit rating expected to be downgraded and Ireland's Anglo Irish bank in hot water once again. 'We still expect to see sterling to trade comfortably above EUR1.20 before the year-end.'

Currencies Direct's Ryan added: 'Sterling/dollar is likely be whipsawed as the debate continues and is set to lose additional ground against the euro.'