Sterling may still hit $1.25 against the dollar, analysts warn

HSBC's David Bloom moonlights as CNBC anchor
HSBC's Bloom moonlights as CNBC anchor

Sterling could continue to see weakness and may plunge further as uncertainty around Brexit and monetary policy easing from the Bank of England (BOE) drives investor sentiment across the U.K.

The currency has seen a lot of volatility in the last two months ever since the U.K. voted to leave the European Union. While the initial moves were dramatic, plunging from the highs of $1.50 to a 31-year low of $1.32, the currency continues to remain under pressure at current levels of $1.29. The currency is down nearly 12 percent since the start of the year.

"We continue to see sterling weakening as we move towards the end of the year," David Stubbs, global market strategist at JP Morgan Asset Management, told CNBC via email.

"As hard evidence of the economic slowdown continues to build, monetary policy is eased further and investment flows into the U.K. are dampened by uncertainty over the policy future, sterling is expected to slip towards 1.25 against the U.S. dollar," he added.

This week sees a slew of post-Brexit data from the U.K. economy. The inflation data on Tuesday saw the largest yearly rise since November 2014. Consumer prices saw a 0.6 percent rise in July compared to the same period last year. This was above analyst expectations for a 0.5 percent rise but some analysts highlighted other nuances of the official figures.

"Although eyes are typically focused on the headline CPI (consumer price index), we note that today's factory gate price data are worthy of attention, given that they provide one of the earliest steers on how the post-Brexit referendum fall in sterling is affecting prices," Victoria Clarke, an economist at Investec Economics said in a research note.

Data deluge continues

Meanwhile, markets await unemployment data on Wednesday, retail sales on Thursday and public finance data on Friday. These figures are expected to give a better picture of the economy post-Brexit.

But with data looming, sterling has set a rather cautious tone for itself. Tuesday morning saw sterling hit a 6-1/2 year-low against a basket of currencies. It then rose on the back of the inflation data release.

British pound coins can be seen next to American Dollar notes.
Christopher Furlong l Getty Images

Nonetheless, analysts have said that while sterling may see some rise initially, the currency will continue to weaken in the next few months due to uncertainty.

"The key factor for sterling is the Brexit related uncertainty and in turn, the economic outlook," Kallum Pickering, senior U.K. economist at Berenberg Bank, told CNBC via email.

He further explained that a sterling appreciation will not come about until growth outlook improves, which hinges on the Brexit jitters subsiding.

"But since the U.K. government has not even triggered the Brexit divorce talks with the EU yet, and probably won't until 2017, uncertainty reigns supreme. For sterling and the U.K. economy, the 12 month outlook does not look bright, to put it mildly," he said.

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