Pound seen staying under $2 as rate cuts loom

By Jonathan Cable Reuters - Wednesday, May 7 11:56 am

LONDON (Reuters) - The pound will remain well under the $2 mark for the next 12 months as cable's value is hit by a slowing economy and expectations for further interest rate cuts, a Reuters poll showed.

The poll of over 60 analysts, conducted May 2-7 showed they expect sterling to be at $1.97 in one month, roughly $1.96 in three months and $1.90 in 12 month's time, little-changed from forecasts in last month's survey.

In the April poll the one-month forecast was $1.99, the three month consensus was $1.98 and the 12-month median forecast was for $1.90, a long way from a high last November of $2.10 -- a level not seen in over 25 years.

The currency fell to a 2-1/2 month low against the dollar at $1.9553 earlier on Wednesday as weak consumer morale and jobs data, coupled with a slowing economy, convinced investors that interest rate cuts are coming, although probably not until June.

The Bank of England is expected to hold rates at 5.0 percent on Thursday but the decision will be a close call.

Some analysts still see the pound trading above $2 in a year, and the poll's wide ranging 12-month predictions between $1.69 and $2.15 demonstrate the complexities forecasters face. Even forecasts for one month diverge widely -- from $1.88 to $2.04.

"It is difficult to envision the pound falling materially against the dollar, but with risk appetite continuing to oscillate back and forth the cable outlook is more murky," said Melinda Smith at ABN AMRO, who sees the pound at $2.057 in a year.

Cross rates calculated by Reuters show one euro worth 78.6 pence in six months and 76.6p in a year, with some predicting it will be over the 80 pence level it broke last month.

The pound hit a record low against the euro of 80.98 pence in April despite rising inflation and a slowing economy in the 15-member bloc.

Any recovery against the European common currency would be short lived as the Bank is expected to continue cutting interest rates while the European Central Bank holds them steady.

However, sterling's current value is well above median forecasts in a poll last May, which saw the pound at $1.93 at this time. Economists had not foreseen a sharp drop in U.S. economic growth, trouble in the financial sector and the Federal Reserve slashing rates.

The Fed has hacked 3.25 percentage points from rates since September in an attempt to support the economy and is widely expected to make a pause its rate-cutting campaign.

The Bank is expected to cut rates more sedately as it grapples with inflation which is well above its 2 percent target and a slowing economy. Economists predicted in a poll last week there would be two more 25 basis point cuts this year.

"Sterling is expected to remain under downward pressure from slowing UK growth and gradual but steady interest rate cuts by the Bank of England through to early 2009," said Howard Archer at Global Insight.

Data released on Tuesday will have made uncomfortable reading for the Bank as it showed activity in the service sector practically stalled while it faced the sharpest rate of cost inflation in the survey's 12 year history.

Consumer price inflation was at 2.5 percent in March, as soaring energy and food prices continue to take their toll while the economy grew at its weakest rate in three years in the first quarter at only 0.4 percent, growing below the long-term trend.

(Polling by Bangalore Polling Unit)

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