Pound slide may switch to dollar from euro for 2009

By Jessica Mortimer - Analysis

LONDON (Reuters) - With all news bad news for Britain's battered economy, sterling's six-month slump may have further to go, but charts show any new year slide is more likely to be against the dollar than the euro.

The pound's sudden drop past 90 pence against the euro in December sparked speculation it would soon hit parity against the single currency as the Bank of England slashed the official rate of return for holding assets in sterling.

But the prospect of more European Central Bank interest rate cuts in months ahead have tarnished the euro at a time when U.S. rates have already reached all but zero, bringing a possible quarter-century low for the pound against the dollar into range.

Analysts say the dollar may also benefit from safe-haven and deleveraging inflows as market stress and global economic weakness persist and chart analysis shows investors who are bearish on the pound will move to target the 2001 low against the dollar of $1.3677 instead of parity to the euro.

A break below that would take it to levels not seen since 1985.

"We think sterling will go below these levels ($1.3677) against the dollar in the first quarter," Standard Bank's head of G10 currency research Steve Barrow said.

Merrill Lynch are even more bearish, forecasting sterling at $1.32 against the dollar by June.

Technical analysts at CBCM noted that a fall below $1.4290 would open up a test of a support line at $1.4190/$1.4200, then potentially the 2001 low.