Pound to buckle under weight of economic gloom

By Simon Falush - Analysis

LONDON (Reuters) - The pound has held up well against major world currencies in the face of some of the worst news about the British economy in recent memory, but currency strategists expect sterling to buckle eventually.

The pound has retreated sharply from its 26-year high set in November above $2.11 and analysts are confident that the data will soon take its toll on the pound and see it return to a downward trend.

"If you look at the story with respect to the UK economy, it's a pretty horrible picture, and that will start to impact on the pound sooner or later," said Simon Derrick, head of currency research at Bank of New York Mellon.

The median forecast by a poll of Reuters analysts forecasts the pound at $1.90 in six months and $1.87 in a year from now.

Banking stocks -- typically a good gauge of the performance of sterling -- have fallen by 28 percent since the start of April while on a trade-weighted basis the pound is steady indicating more scope for possible weakness.

On a trade-weighted basis sterling's little changed since the end of March and against the dollar it is well above the year's low of $1.9335, set in January.

It is also holding up relatively well against the euro. After surging to a record high of 80.98 pence in April, the single currency has mostly remained under 80 pence.

One factor that has been supporting the pound is inflation which is preventing the Bank of England cutting rates from 5 percent -- the highest in the Group of Seven industrialised nations.