Pound seen well under $2 as recession chances rise

The pound will weaken against the dollar in the coming year and stay below $2 on expectations of interest rate cuts in 2009 and as the chances of a British recession increase, analysts forecast in a Reuters poll.
The survey of around 60 analysts, conducted this week, showed they expect sterling to be at $1.95 in one month, $1.94 in three months, and $1.85 in 12 months' time, slightly down from forecasts in last month's survey.
"Pound/dollar is gradually gaining traction to the downside and we would expect this trend to remain in place. A weakening profile for the UK economy is likely to remove an important prop for the currency," said Kenneth Broux at Lloyds TSB.
In the July poll, the one-month forecast was $1.97, the three month consensus was $1.95 and the 12-month median forecast was $1.87, a long way from a high last November above $2.10 — a level not seen in over 25 years. Only one forecaster, Nicole Elliott at Mizuho Corporate Bank, still sees the pound at over $2 in 12 months, down from four last month. But the poll showed a wide range of forecasts — from $1.6 to $2.15.
Sterling volatility against the dollar is seen increasing in the next few weeks, rising to 7.0 percent this month from an actual 6.3 percent in July. The divergence of forecasts in Reuters polls offers a leading indicator of exchange rate volatility.
Sterling's current value is above the forecast of 12-month forecast of $1.945 in last August's poll. But Britain's economy has not escaped an economic downturn a year after mortgage problems in the United States hit markets globally.
Preliminary data show it grew only 0.2 percent in the second quarter, its weakest pace in three years. A Reuters poll last month found economists forecast growth of only 1.5 percent in all of 2008, a sharp drop from 3.0 percent in 2007. Cross rates calculated by Reuters show one euro worth 79.4 pence in six months time and 78 pence in a year. Some economists forecast it will again break through the 80 pence mark, a level it been flirted with after hitting it in April.
In last month's poll the euro was forecast at 79.5 pence in six months and 78 pence in a year.
The pound has slid against the euro this year despite a slowing euro zone economy, most recently after the European Central Bank boosted the common currency by raising interest rates in July.
In Britain, rates are expected to stay at 5.0 percent until the end of the year before falling early in 2009.
"The Bank of England is expected to cut interest rates significantly in 2009 in reaction to extended very weak economic activity, sending the pound down," said Howard Archer at Global Insight.