Sterling dives yet again but traders look for a rebound

Short changed: Many bureaux are already offering less than 1 for £1 after fees

Bill Condie11 April 2012

The pound crashed to a fresh low against the euro today but many analysts predict it is set for a rebound.

Amid more grim news on house prices, sterling crashed to just 1.021, down a huge 2.6 cents on Boxing Day's close. That meant a euro buys a massive 97.78p.

Bureaux de change were offering about 0.985 this afternoon.

If the pound hits parity, it would be the first time since the single European currency's launch a decade ago.

The bleak outlook for the British economy, combined with expectations that the Bank of England may cut interests rates faster and further than the European Central Bank has kept pressure on the currency.

Today's Hometrack data showed house prices tumbled 8.7% in 2008, led by a 10.1% slide in London.

Nevertheless, some traders believe the British currency may be near the bottom. Sterling will strengthen 14% against the euro in 2009, according to the median forecast of 42 analysts and strategists surveyed by Bloomberg.

"We will see signs of life in the UK economy sooner than in the eurozone," said Henrik Gullberg, a strategist with Deutsche Bank in London.

Others said the eurozone's own problems could come into play soon.

"While the outlook for the UK economy is pretty terrible, we're at a stage where that's already in the price," said Ian Stannard, a senior currency strategist in London at BNP Paribas.

"The big shock next year is going to come from the eurozone as the economy contracts much more than currently expected. The ECB will have to wake up and start cutting rates. That's going to really damage the euro."

The pound has also weakened against the dollar and yen, falling 26% against the greenback and 40% against the Japanese currency, the biggest declines since at least 1972.

The speed and depth of losses against other currencies may add to pressure for a rebound as traders consider the wisdom of bets on further sharp falls.

But the economic data continue to be grim. Britain's gross domestic product shrank at an annualised rate of 0.6% in the third quarter, the first drop in 16 years, the Office of National Statistics said before Christmas.

Forecasts by economists say the economy will contract 1.4% next year.