Pound to hover against dollar in coming year

LONDON (Reuters) - The pound will gradually strengthen against the dollar over the coming 12 months but is unlikely to move much as a dovish central bank and weak fundamentals weigh on the currency, a Reuters poll showed on Wednesday.

The monthly poll of almost 70 analysts, taken this week, saw the pound at $1.62 in one month, slightly down from the $1.65 it was trading at earlier Wednesday but above the $1.60 predicted last month.

Median forecasts saw cable strengthening slightly to $1.64 in six months and to $1.65 in a year. This compares to $1.62 and $1.65 forecast in October's poll.

"With the Bank of England set to announce a further increase in quantitative easing Thursday ... it is hard to put forward the case for an intrinsically higher pound-dollar," said Kenneth Broux at Lloyds TSB.

The Bank of England has cut interest rates to an historic low of 0.5 percent and has been injecting billions of pounds directly into the money supply to try and kick-start the economy.

The central bank is expected to leave rates on hold on Thursday at the end of a two-day meeting and well into 2010 but is seen raising its quantitative easing program spending, with economists split between an increase to 200 billion pounds or 225 billion pounds from the current 175 billion pounds. The lack of consensus on the central bank's next move has further muddied the waters for sterling.

The range of forecasts was therefore relatively wide, from $1.39 to $1.86 in a year, marginally tighter than last month's poll but all a long way from the $2.10 the pound was at just under two years ago and the 23-year low of around $1.35 hit in January.

Sterling hit a 5-month low last month against the dollar after inflation data cemented views that interest rates were staying near zero and concerns about the UK's fiscal position prompted dealers to dump the pound.

"The combination of a large fiscal deficit, dovish central bank and weak fundamentals should see sterling underperform into year-end and into 2010," said Camilla Sutton at Scotia Capital.

EURO EVEN

Against the euro, the pound was seen gaining some ground through the coming year but forecasts were little changed from last month despite the improving outlook for the 16-nation bloc's economy.

The currencies nearly reached parity at the end of last year but the pound has rebounded since and cross rates calculated by Reuters show it trading at 91 pence in three months and 87 pence in a year.

That is in line with forecasts from last month's poll and not far from the 89 pence it was at earlier Wednesday.

"In the context of the unexpected expansion of QE, we have revised up our end-2009 EUR-GBP forecast. However, we still look for EUR-GBP to correct lower in 2010," said Mengxian Jiao at BoAML.

Britain's economy contracted in the third quarter, quashing hopes the downturn had ended and marking the longest recession on record, surprising markets that had expected a return to growth.

Data released Monday showed manufacturing activity grew at its fastest rate in two years in October, while figures earlier Wednesday showed the dominant service sector saw its strongest activity since August 2007.

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.

(Polling by Bangalore Polling Unit)