Sterling under pressure on QE prospects

Sterling will remain under pressure in the near-term thanks to the increasing likelihood of a second round of quantitative easing by the Bank of England, a Reuters poll showed. In a year's time, however, sterling will appreciate against the US dollar as policymakers find a fix to the debt crisis plaguing the euro zone, Britain's close trade partner.
A poll of around 60 currency strategists taken this week showed they expect the pound to trade at $1.54 a month from now, $1.57 in six and $1.60 in a year. That compares with $1.63, $1.63 and $1.64 respectively in a September poll. The median one- and three-month forecasts for sterling are the lowest since a poll taken in September 2010.
"Sterling downside comes in the form of QE2 from the BoE, which we believe will happen," said Tom Levinson, FX strategist at ING. "Our core scenario is that some sort of muddle-through approach is achieved by the euro zone in the next few months." The Bank of England is expected to hold off on pumping more money into the economy when it meets on Thursday, but will add another 50 billion pounds to asset purchases in November, according to a Reuters poll of economists.
Sterling is expected to remaining flat against the euro over the course of the next year, trading at 85.9 pence in a month, 86.3 in six months and 85 pence in 12 months. Those consensus forecasts compare with 87.7, 86.8 and 86.1 pence respectively in the previous poll and around 86 pence where it was trading earlier on Wednesday. Sterling looks set for a less volatile month compared with September, according to calculations derived from the standard deviation of forecasts from the poll.
Annualised volatility is expected to fall to 7.6 percent for the pound from the 9.4 percent seen last month. The pound rose to $1.5474 against the US dollar from a near 13-month low of around $1.5439 early on Wednesday after survey data showed the dominant services sector surprisingly expanded last month. But the British economy effectively stalled in the nine months to June. Official data released earlier on Wednesday showed second-quarter GDP growth revised down to 0.1 percent from the 0.2 percent previously reported.
Minutes from the BoE's September meeting showed Monetary Policy Committee member Adam Posen remained the only one to vote for an extra 50 billion pounds in asset purchases but most members thought it was increasingly likely that more would be warranted at some point.
Another round of asset purchases would flood the market with the UK currency, keeping it under pressure. "By virtue of being a European currency and by virtue of being a small open economy with exposures to the euro area, it (sterling) will also move lower in tandem with the euro," said Raghav Subbarao, Forex strategist at Barclays Capital.