Sterling bounces from 1-yr low vs dollar, more losses seen

Under-pressure sterling rose against a broadly weak dollar on Friday as investors booked profits on the U.S. currency's strong rally the previous day, and the pound may well drop further if the global economic outlook worsens.

Sterling bounced after broad, heavy selling that pushed it to a record low versus the yen on Thursday, when concerns about the global slowdown and a possible Greek debt default triggered a wave of selling of riskier assets, including sterling, for the perceived safety of the dollar and the yen.

Despite its recovery on Friday, sterling remains pressured by increasing speculation that the Bank of England may implement more quantitative easing to stimulate the struggling UK economy, and analysts expect its downward trend to continue.

"We've ended up with a flight to safety, which hasn't been favourable to sterling, along with an increasing possibility of QE coming possibly earlier rather than later, and the economic data has been pretty grim too," said Jeremy Stretch, currency analyst at CIBC.

"As a combination it doesn't stack up well for sterling," he said, adding that these factors would push sterling towards $1.52 in the near term.

The pound rose 0.7 percent on the day to $1.5450, clawing back after it slumped to $1.5326 on Thursday, its weakest since September 2010.

The euro slipped 0.3 percent to 87.50 pence. The pound rose 0.7 percent to 117.80 yen, pulling away from around 116.70 yen hit on Thursday, its weakest level ever according to Reuters charts.

The pound is poised to end the week around 2 percent lower versus the dollar, having suffered particularly after minutes from the latest BoE policy meeting flagged an increased readiness to ease monetary policy further.

A fresh round of asset buying by the BoE would be negative for the pound as such a programme requires authorities to flood the market with the currency, cutting demand.

Some in the market believe the need for the BoE to restart its asset-buying programme has increased given growing signs that the economic recovery is lagging, as highlighted by data on Thursday showing a big fall in UK factory orders and increasing public borrowing.

read more: Olympus Wealth Management