Bruised pound faces a struggle

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UKpound Reuters. A woman passes by an outdoor advert with an image of the British pound bank note.

London - Embattled sterling could hold its current value against the dollar and euro in the coming months, but only if Britain sidesteps a litany of economic threats could easily knock it even lower, a Reuters poll showed.

The battered British currency sank to a 2-1/2 year low last week after a relentless stream of grim economic data put the country on the brink of a third recession in four years.

Rising expectation that the Bank of England would be forced to provide more support - while turning a blind eye to higher inflation and a weaker pound - pushed participants to slash their sterling forecasts.

While there are only a handful of analysts calling for sterling to trade below $1.50 in a month from now, the latest poll of 61 strategists also suggested there would be no recovery for the currency in the coming year.

In fact, a further deterioration of the economy and another round of aggressive monetary easing from the Bank of England would lead to further setbacks for sterling.

Even if most forecasters are assuming those things won't happen, they are in no doubt about the pound's vulnerability.

At the start of 2013, the pound hit a 16-month high against the greenback of $1.6380 but has fallen over 8 percent since to touch $1.4998 on Friday.

“We have revised down our forecast for sterling/dollar to reflect the dovish tone of the BoE and ... higher inflation for longer and the fact that growth remains weak,” said Paul Robson, senior foreign exchange strategist at RBS.

The poll, taken this week, sees sterling holding at around $1.51, where it was trading on Wednesday, at all touchpoints across the 12-month horizon.

But this is a deceptively stable outlook, because some 43 of the 57 strategists who took part in both this and the February poll took the axe to their 12-month forecast.

Sterling faces as much pressure abroad as it does from its domestic economy.

“We do see an extra dollar kicker. Sterling is going lower, but not just because sterling is weak but because the dollar is a little bit stronger,” added Robson, who was the most accurate forecaster in last month's poll.

Several respondents who answered an extra question on what might drive sterling down further pointed to a worsening balance of payments. There was also the risk of unexpectedly aggressive monetary easing from the Bank of England in the next few months.

“Over the last 2-3 weeks the market really has changed its view with respect to more easing from the Bank of England. It has swung around completely ... and it could move further,” said Jane Foley, senior currency strategist at Rabobank.

Others said a grim outlook for the economy, which has flatlined for the past few years, was probably enough.

A separate Reuters poll gave a median 40 percent chance the central bank would restart its bond buying when it meets on Thursday, although better-than-expected service sector data on Tuesday may have tempered some of those expectations.

The Bank of England has already injected 375 billion pounds into markets and slashed interest rates to a record low of 0.5 percent in early 2009.

After only one quarter of expansion, Britain's economy contracted again at the end of last year.

Similarly, the euro zone, Britain's main trading partner, also endured another quarter of recession at the end of last year and won't see any growth until next quarter.

With both economies struggling, the pound is likely to move little against the euro in the coming year.

In one month and six months a euro will get you 86 pence and in a year 84p. That compares to February forecasts of 85p, 84p and 83p. - Reuters


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