Sterling's recent rally will fizzle out in the coming year as the Bank of England holds firm on keeping interest rates steady until 2015 at least, despite an improving economic outlook, a Reuters poll found on Wednesday. The United States Federal Reserve also is expected to begin winding down its massive bond-buying programme next year, probably in March, offering support to a dollar that has struggled to maintain power. "That's the overall story, so cable might struggle," said Geoffrey Yu, a currency strategist at UBS.
One pound will fetch $1.60 in a month, $1.57 in six months and just $1.55 this time next year, little changed from October forecasts, according to the poll of over 60 foreign exchange specialists taken this week. Sterling has gained over 8 percent since hitting a 3-year low in July and was trading at $1.61 earlier on Wednesday. Forecasts for the 12-month horizon were wider than last month - ranging from $1.34 to $1.71 - highlighting market uncertainty.
Bank of England Governor, Mark Carney said in August British interest rates would not rise from their record low of 0.5 percent at least until unemployment - at 7.7 percent in August - falls to 7.0 percent, something he did not see happening until the third quarter of 2016.
A Reuters poll of economists taken last week following a raft of upbeat data said the Bank would bring forward by at least three months its expectation for when the jobless rate will hit 7 percent. But even that, in early 2016, was too pessimistic, the poll concluded. The consensus was that the jobless rate would likely reach 7 percent by late 2015 or possibly sooner.
"The UK was one of the big positive surprises this year in that the growth picture developed more positively than many had thought to be possible," said Sonja Marten, senior FX strategist at DZ Bank and one of the two most accurate one-month forecasters in the October poll. "For now, the growth is there and for the BoE it means that their horizon for potential rate hikes is shifting forward. Not into 2014 but definitely 2015, and potentially the early part of 2015, which wasn't at all on the cards before."
The Fed shocked markets in September when it said it would continue to buy $85 billion per month of Treasury and mortgage-backed securities, rather than tapering the amount as had been widely expected. It is now seen reining its purchases from its March meeting, a move that would add strength to the greenback. The pound will, however, make gains against the euro as the common currency suffers while the bloc's economic recovery struggles to gain momentum.
While the European Central Bank is expected to leave interest rates on hold on Thursday, there is a growing number of economists who think the ECB will cut them again soon to encourage a fledgling recovery. One euro will be worth 84.3 pence in a month, 83.1p in 6 months and 82.1p in a year, little changed from last month's forecasts. "Sterling is expected to strengthen significantly against the euro, so I wouldn't really call it a weakening at all on trade-weighted terms," Yu said.
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