"The pound has got downside risk versus the dollar," said Tony Norfield, global head of treasury research at ABN Amro. The outlook for slowing growth and falling interest rates "doesn't justify the pound at these levels [against the US currency]", he said.
On Friday, the pound closed little changed at $1.6531. That marks a gain of about 2 per cent from Tuesday's four-and-a-half-month low of $1.6237. It strengthened to pounds 0.7017 per euro from pounds 0.7076 Thursday, as the euro's fall against the dollar took it lower against other major currencies.
Reports are due this week on retail sales, fourth-quarter economic growth and inflation. The minutes of the Bank of England's January rate meeting will also be released.
"The Bank is poised to cut rates again in February, which is marginally negative for sterling," said Adam Chester, a treasury economist at Halifax.
Analysts expect the annual inflation rate, as measured by the rise in retail prices excluding mortgage interest payments, to have fallen to 2.4 per cent in December. That's slower than the Government's 2.5 per cent target. The report is due on Tuesday.
"We think it will nudge down below 2.5 per cent," said Steven Bell, the chief UK economist at Deutsche Bank. Subdued inflation and signs of slowing growth will persuade the Bank of England to cut rates to "4.5 per cent by the middle of the year", he said.
Expectations for more rate cuts are reflected in the interest rate futures market. The implied yield on the June contract stands at 5.13 per cent, low enough to suggest that many investors expect borrowing costs to fall by more than 50 basis points before June. The bank's rate-setting Monetary Policy Committee next meets on 3 and 4 February.
The dollar rose against the euro for the first day in four on optimism after the Brazilian decision to float the real, which fell almost 11 per cent to 1.4800 to the dollar after the announcement.
"This was long overdue," said John Rothfield, a currency strategist at BankAmerica. While a weaker real "will lead to short-term difficulty due to the increased local cost of funding foreign debt, it's going to shorten the time it takes for recovery". The dollar traded at $1.1595 per euro from $1.1690 on Thursday.
The Swiss franc is predicted to rise against the dollar this week, on the speculation that Brazil's currency turmoil will persist, turning traders to the Swiss currency as a haven. The dollar soared against the franc on Friday on the hope that Brazil's decision to let the real float freely will speed recovery and ease pressure on the US, which does a fifth of its trade with Latin America.
Yet economists said Brazil's economic troubles are far from over, and traders are likely to shun the dollar in favour of haven currencies. "I see the Swiss franc recovering," said Mr Norfield. "The boost to the dollar will be short lived. The hope that Brazil has got a better chance of recovering will unwind."
The dollar rose to SFr1.3775 on Friday from SFr1.3622 on Thursday. That still left it down 1.3 per cent on the week.Reuse content