Pound seen under $2 as economy slows and Bank cuts

By Jonathan Cable

LONDON (Reuters) - The pound will weaken against the dollar over the coming year, staying below $2, as it suffers from a slowing economy and expectations for a further cut in interest rates, a Reuters poll showed.

The survey of over 60 analysts, conducted this week, showed they expect sterling to be at $1.97 in one month, $1.95 in three months, and $1.87 in 12 months time, little changed from forecasts in last month's survey.

"A progressive weakening in UK economic indicators should weigh on GBP-USD over the forecast horizon," said Kenneth Broux at Lloyds TSB, who sees the pound at $1.79 in 12 months.

In the June poll, the one-month forecast was $1.96, the three-month consensus was $1.95 and the 12-month median forecast was $1.88, a long way from a high last November of $2.10 -- a level not seen in over 25 years.

Sterling hit a two-month high of $2.0006 on Tuesday before retreating as a surprisingly strong U.S. manufacturing survey contrasted with news of a contraction in the sector in Britain.

Some strategists still see the pound at over the $2 mark in 12 months with the poll showing a wide range between $1.68 and $2.15. The highest forecast in last month's poll was also $2.15.

Sterling's current value is well above median forecasts in a poll last July, which saw the pound at $1.93 at this time. Currency strategists had not foreseen a sharp drop in U.S. economic growth, trouble in the financial sector and the Fed slashing rates as much as they have done.

The economy has not escaped the global slowdown and grew at only 0.3 percent in the first quarter, its weakest pace in three years, and a Reuters poll last month found economists forecasting economic growth at only 1.7 percent in 2008 -- a sharp slowdown from the 3.0 percent seen in 2007.

"A larger and more protracted than expected slowdown is underway for the UK economy. This should push sterling - which is overvalued - lower," said Asmara Jamaleh at Intesa Sanpaolo.

Cross rates calculated by Reuters show one euro worth 79.5 pence in six months time and 78 pence in a year, with some economists forecasting it will again break though the 80 pence mark, a level it has been flirting with after hitting it in April.

The pound has been sliding against the euro this year despite record inflation and a slowing economy in the 15-nation bloc as the European Central Bank has held rates steady while the Bank of England has cut borrowing costs.

Any recovery against the euro is likely to be short-lived as the ECB is expected to raise interest rates when it meets on Thursday while the Bank is still seen making further cuts to British rates this year.

The Fed has been much more aggressive in cutting interest rates, hacking 3.25 percentage points off the funds rate since September to 2.0 percent in an attempt to shield the world's biggest economy from recession.

"Recent cable recovery seems related more to some dollar weakness than to better UK data. The BoE's dilemma on rates should keep sterling under pressure in the medium term," said Roberto Mialich at UniCredit.

House prices, a bedrock of consumer wealth, are expected to fall 5.0 percent this year and next while mortgage approvals fell to its lowest level on record in May, raising fears that the housing market is in for a protracted and painful slowdown.