"Everyone thinks the Bank of England is going to take off 25 basis points in November, including us," said Elaine Cairns, manager at Standard Life Assurance.
That cut, she said, "is already priced in". She expects the pound to fall to DM2.60 over the next year.
On Friday, the pound fell more than one pfennig to DM2.7701. Against the dollar, the pound fell to $1.6913 from $1.6947 late Thursday.
The UK currency has fallen 19 pfennig in the past two months on concernthat UK rates will fall while the Bundesbank stands pat.
Last week, Germany's policy makers kept Germany's key rate unchanged at 3.30 per cent, while an economic report on Friday confirmed that UK growth is slowing, making a British rate cut more likely.
Gross domestic product grew an annual 2.5 per cent in the third quarter. That was better than the 2.4 per cent expected by analysts but less than the 3.0 per cent growth in the previous quarter.
"There'll be a growth pause over the next year and in that background it's appropriate for rates to come down," said Stuart Wigfall, manager at Fuji-Lord Abbett International.
He expects the pound will fall to $1.60 in the coming months and the benchmark interest rate will fall to 6.50 per cent by the third quarter next year. "We're not as optimistic as the futures market," he said.
The implied yield on the June interest rate futures contract stands at 5.87 per cent, far enough below current three-month lending rates to suggest many traders expect rates will fall below 6 per cent by the middle of next year.
The implied yield on the December contract, meantime, stands at 6.71 per cent, suggesting expectations that borrowing costs will fall by 50 basis points before the end of the year. Some investors said those expectations are overdone.
"I'm not convinced sterling will fall, because I'm not convinced rates will come down as quickly or as far as the market is saying," said Theodora Zemek, at M&G Investment Management.
"The pound is probably fairly valued here."
The dollar rose for the fourth day on Friday against the yen after the Japanese government took over Long-Term Credit Bank of Japan and Moody's Investors Service said it may cut the ratings of four major Japanese banks.
The nationalisation of LTCB is the first test of a plan to revitalise the debt-burdened banking system, a process which could take several years.
"There is hope for a recovery but the immediate situation is still very bad [for the economy and the yen]," said Keisuke Aso, foreign exchange manager at Bank of Tokyo Mitsubishi. He said that sentiment will push the dollar to Y120 this week.
The dollar rose as high as Y119.59 before giving up some of those gains in New York on Friday on talk that investment banks and some hedge funds sold dollars to cover recent losses in other markets.
"Hedge funds continue to unwind" dollar positions said Domenick Presa, chief trader at Generale Bank. "We know there's an interest to sell dollars above Y119."Reuse content