"We see the pound going down further," said Dieter Gloeckner, a salesman at Deutsche Girozentrale-Deutsche Kommunalbank in Frankfurt. "We see UK inflation undershooting the Government's target and UK benchmark interest rates falling while US interest rates may be raised," he said.
On Friday the pound fell as low as $1.5505, its lowest level since September 1996, leaving it down 6.5 per cent this year. It could fall to $1.52 in three weeks, said Gloeckner. The pound slipped against the European Union's single currency, leaving the euro at 0.6582 pound, from 0.6542.
Traders will get their next glimpse of the inflation outlook from the June retail price index, scheduled for release on Tuesday.
The RPI less mortgage interest payments, the central bank's main inflation barometer, is expected to be at 2.2 per cent. The central bank is charged with keeping retail price increases above 1.5 per cent and below 3.5 per cent. A lower-than-expected inflation figure could keep alive talk that the central bank, which this week left its benchmark unchanged at 5.0 per cent, may cut rates again. "If inflation heads lower, that may raise concern about a sustained undershoot of the Government's target," said John O'Sullivan, an economist at Greenwich NatWest, though he said the most likely scenario is that UK rates have "troughed".
A report on Friday by the British Retail Consortium showed the price of commonly purchased goods in UK stores fell 0.7 per cent in June from levels of a year ago. The report "indicates that in some sectors of the economy deflation is already a reality and there is no sign of overheating" in the retailing industry, said Ann Robinson, the BRC's director general.
More evidence of benign price gains could come from reports on Wednesday showing slowing wage costs and average earnings growth.
Meanwhile, the pound is seen losing ground against the dollar as expectations for higher US interest rates increase the allure of deposits denominated in the US currency. Traders will get more clues on US inflation from reports on producer and consumer prices slated for release on Wednesday and Thursday, respectively.
In one signal that investors see the Fed raising its benchmark interest rate at least 50 basis points by the end of the year, yields on eurodollar futures expiring in December are 5.84 per cent.
Three-month dollar deposits offer investors 24 basis points more than those denominated in the pound. Deposit rates in both countries were level a month ago.
The pound's losses are likely to be limited amid signs of a rebound in the UK economy and as UK exporters who sell their products in the US sell dollars and purchase pounds, traders said. Selling dollars in the forward market now for purchase at some later date can boost profit by enabling companies to buy a larger amount of cheap pounds when they bring profits home.