Sterling's tumble against the U.S. dollar this week may mark the beginning of a longer fall into year-end amid expectations that interest rates will remain lower for longer, analysts say.
On Friday, Sterling weakened to $1.5671, its lowest level since September 2013, after weak housing data on Thursday cemented beliefs that the Bank of England (BOE) is unlikely to hike rates from their record low of 0.5 percent anytime soon. Sterling is down over 1 percent against the dollar this week and over 5 percent year to date.
"Sterling is the fall guy. The GBP/USD will fall all the way to 1.50," said Kit Juckes, macro strategist at Société Générale, in a note.
U.K. house price growth weakened to an 18-month low in October, a survey from the Royal Institution of Chartered Surveyors (RICS) showed, with the London index postings its biggest decline in four years. Fears of soaring national prices had previously underpinned expectations of an interest rate hike. In September, the BOE said that it could raise rates by early 2015.
"Markets were expecting the BOE to lead in interest rate normalization, but that's no longer the case given recent data," said Nizam Idris, head of strategy, fixed income and currencies at Macquarie.
Idris is slightly less bearish; he expects Sterling to stabilize around $1.55 in the near-term, but warned that the fledgling economic recovery in the euro zone – the U.K.'s largest export destination – remains a headwind.
Capital Economics expects Sterling to end the year at $1.55 and hit $1.50 in 2015.
"The market is now anticipating that the overnight rate will be a bit higher in the U.S. than in the U.K. in two years' time, whereas four months ago it was expecting it to be a lot lower. Still, our own view is that the gap between overnight rates in U.S. and U.K. will end up considerably larger than both the markets and the consensus of economic forecasters thinks even now," said John Higgins, the group's chief markets economist.
On Wednesday, the BOE warned that inflation was likely to fall below 1 percent over the next six months, well below its 2 percent target, bolstering assumptions for monetary policy to remain accommodative.
SocGen's Juckes said that the inflation report was more dovish than most expected and that market participants have every reason to push out rate hike expectations. Both Macqaurie and Société Générale expect a rate hike after the general elections in the second-half of 2015.
Supportive comments from Governor Mark Carney also saw Sterling widen losses this week.
"It's appropriate that while tightening in monetary policy remains in prospect, markets now expect somewhat easier monetary conditions over the forecast period than was the case three months ago," Carney said in a press conference on Wednesday.
Mr. Carney is playing a dangerous game by waiting for positive economic evidence to tighten policy, Jeremy Stretch, head of FX strategy at CIBC, told CNBC.
"Markets may become too relaxed about the prospects of rate hikes well into 2015," he said. "If [economic] data holds up well into the end of this year and the beginning of next, then there are a number of justifications for rates to head higher and that market complacency could be tested."