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Sterling set to sink lower as UK firms start to feel the benefit

Sterling heading lower? Absolutely, says strategist

The U.K. pound is expected to push even lower in the coming months, according to currency analysts, as the first signs emerged this week of the impact - and in some case benefits - it's giving to the country's business sector.

Sterling is still hovering at 31-year lows against the dollar after falling around 11 percent following the U.K.'s decision to leave the European Union in late June. The currency received another hit Tuesday when notable Bank of England hawk Martin Weale threw his weight behind a new stimulus package for an economy that's showing the first signs of a downturn.

The central bank is expected to ease policy soon, according to Simon Derrick, chief currency strategist at BNY Mellon, who suggests that U.K. politicians and officials have let sterling "take the strain" in times of economic stress since the 1930s.

"Do I think we're heading lower (for sterling)? Absolutely," he told CNBC Monday.

Kit Juckes, global head of foreign exchange strategy at Societe Generale, agrees and said in a note Tuesday that he expected "lower rates and more asset purchases and, albeit choppily, a weaker pound too."

Stimulus from the Bank of England is seen as negative for the currency as the extra liquidity it creates essentially flooding the system. Despite surprising investors by holding rates this month, most members of the Bank of England's monetary policy committee are expecting some sort of loosening in August.

Meanwhile, in a flurry of earnings news this week some U.K. firms are reporting that the weaker currency is helping them boost top-line figures. Specialty chemicals maker Croda said Tuesday that sterling weakness will benefit its reported results and engineering group GKN also said it had a positive impact on its quarterly earnings. U.K. hedge fund manager Man Group reported Tuesday that it had higher sterling costs in comparison to revenue, "so any continued weakness in sterling will be a net benefit (for the company) from 2017 onwards."

The fall in the currency also impacted the proposed "megabrew" deal between SABMiller and AB Inbev with an improved offer now on the table.

Data from research firm Markit last Friday showed that new export business in the U.K. rose by its greatest extent for almost two years this month, attributing it to the sharp drop in the sterling exchange rate.

Woman looks at chart showing drop in sterling against U.S. dollar in London on June 24, 2016.
Daniel Sorabji | AFP | Getty Images

But the effects of a weaker currency are complicated.

On paper, exports should be buoyed as foreign buyers are more likely to purchase the cheaper goods. But the downside of a weaker exchange rate is a steep rise in manufacturers' raw material and component costs, due to higher import costs.

A combination of increased input costs and softer domestic demand will make conditions even harder for export-oriented industrial firms, according to Kallum Pickering, a senior U.K. economist at Berenberg,

"While some exporters might receive a boost from the weaker sterling – down 15 percent on a trade-weighted basis since November - evidence from past depreciations suggests the boost to exports will be modest," he said in a research note on Monday.