Sterling to regain some lost ground over coming year

2 minute read

Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

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LONDON, July 6 (Reuters) - Sterling, down nearly 12% against the dollar since the start of this year, is likely to regain around half of its lost ground in 2022 over the next 12 months as the Bank of England looks set to continue raising interest rates, a Reuters poll found.

The BoE was the first major central bank to increase borrowing costs to try to tame soaring inflation but has been overtaken by a hawkish United States Federal Reserve.

Since December the BoE has lifted Bank Rate five times and said last month it would act "forcefully" if it saw signs of inflationary pressures becoming more persistent. However, the Bank has kept increases to 25 basis points compared to a recent 75 basis point hike by the Fed - with more expected.

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An escalating row over Northern Ireland's status following Brexit that could upend British trade ties with the European Union has also hurt sterling.

Adding to the currency's woes, the economy is showing clear signs of a slowdown while Prime Minister Boris Johnson's tenure is under threat following the resignation of ministers who said he was not fit to govern. read more

Yet according to the July 1-6 Reuters poll of 60 foreign exchange experts the pound was expected to gain almost 7% and be worth $1.27 in a year. It was trading around a two-year low of $1.19 on Wednesday.

"It's going to be a rocky period before we turn higher. Most people, like ourselves, think cable will turn around by the end of the year because the dollar story turns," said Chris Turner at ING.

"But there is a big question mark about that ... and sterling has many hoops to jump through."

When asked what sterling's lowest point would be in the next three months the median forecast given was $1.18, with estimates ranging from $1.10 to $1.20. It touched $1.1897 on Tuesday.

"While the domestic economic cycle is going to be a headwind for sterling and the political issues pose downside risks, stretched valuations and positioning levels suggest the downside potential is limited," said Roberto Cobo Garcia at BBVA.

Against the euro, sterling fared better this year, weakening only around 2%, and it was expected to trade in a narrow band over the next 12 months with 1 euro likely to get you 86-87 pence, the poll found.

(For other stories from the July Reuters foreign exchange poll: read more )

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Reporting by Jonathan Cable; Polling by Sujith Pai, Aditi Verma and Sarupya Ganguly; Editing by Alison Williams

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