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Sterling forecasts cut again on election worries

Source: Reuters - Thu 15th Apr 2010

Fears that the May 6 election will not deliver a clear majority have driven foreign exchange strategists to further downgrade their views on sterling for the coming year, according to the latest Reuters poll.

Median predictions from the monthly poll of 63 analysts at top currency dealers taken this week saw cable at $1.55 in a year's time, down from last month's prediction of $1.59 and a far cry from the 12-month expectation in February of $1.64.

One-month predictions saw the pound at $1.51, in line with last month, before rising to $1.53 in 6 months, which is also below the $1.55 predicted in March.

Sterling closed at $1.52 on Wednesday, having hit a 10-month low of $1.4781 early last month.

The range of forecasts in the poll - from $1.31 to $1.73 in a year's time - was the narrowest in the past year, again as the highest forecast was lowered.

A third of the analysts polled, 21 of 63, see the pound at or below the $1.50 mark in a year, compared with 17 of 62 in last month's poll.

"We expect GBP/USD to trend lower towards the general election in May with the market concern over a hung parliament mounting," said Kamal Sharma at JP Morgan.

Prime Minister Gordon Brown confirmed on Tuesday the general election would take place on May 6 and polls predict the outcome will be a hung parliament, with the centre-right Conservative party having a greater share of the vote but not enough seats in parliament to secure an overall majority. 

An inconclusive election result is the worst-case scenario for financial markets, which want the next government to have a clear mandate to tackle a budget deficit forecast to exceed 11 percent of gross domestic product in the 2010/11 fiscal year.

The Labour Party has gained ground on the Conservatives, two opinion polls showed on Thursday, contrasting with a third poll that suggested the Conservative Party has extended its lead.


Against the ailing euro, the pound is expected to gain ground as the British economy picks up steam faster than in the 16-nation bloc.

That may lead the Bank of England to raise interest rates from their record low sooner than the European Central Bank.

The BoE left rates at just 0.5 percent on Thursday but is seen gradually hiking rates from the fourth quarter while the ECB holds fire until early next year.

Median forecasts show the euro trading at 88 pence in six months and 85 pence in a year, compared last month's forecast for 87p and 86p respectively.

"Euro zone economic recovery is uneven and sovereign issues are rising," said Sara Hoenig at CBA.

Both the British and euro area economies are seen growing 1.2 percent this year. British GDP is seen growing 2.3 percent next year as opposed to just 1.5 percent in the euro area. 

The Organisation for Economic Co-operation and Development said on Wednesday the British economy was likely to grow faster than its leading euro zone rivals.

Sterling hit a seven-week high against a broadly weaker euro on Thursday as worries about how Greece will fund its large debt persist and after a strong reading of UK industrial output.

Sterling volatility against the dollar was seen falling over the coming month. Analysts say the divergence of forecasts in Reuters currency polls offers a leading indicator of exchange rate volatility in the following month.

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