Pound slide may subside as Bank cuts priced in

By Naomi Tajitsu - Analysis

LONDON (Reuters) - The pound's precipitous fall against the dollar since late July shows signs of petering out as investors conclude they have gone far enough on pricing in aggressive cuts in Bank of England interest rates.

SONIA interest rate futures show the market has priced in 50 basis points of Bank rate cuts by February, and analysts say markets have allowed for a further 50 basis points' by this time next year.

That view has battered sterling, driving it 3 percent lower so far this month in September to $1.7448 on Thursday, its weakest since April 2006, after a near-9 percent spill in August.

It has also plumbed a record trough of 81.86 pence to the euro on the view that the European Central Bank won't cut rates anytime soon, although a weak economic outlook for the euro zone is seen preventing more big euro gains.

Charts show that similar falls for the British currency have often been followed by spells in consolidation, suggesting that a similar move may now be in store.

"The market is front-loading weakness in the UK economy and interest rate cuts," said Geoffrey Yu, FX strategist at UBS.

"Market pricing of sterling weakness has probably reached its peak. How much more can weaker growth be priced in?"

The takeover of two battered U.S. mortgage agency giants by the U.S. Treasury and disappointing earnings by Lehman Brothers paused dollar gains early this week, but an ongoing wave of risk aversion is seen keeping the dollar in demand.