By Jessica Mortimer and Veronica Brown
LONDON, March 3 (Reuters) - Official preparations to flood the economy with cash may prompt sterling to retest 23-year lows against the dollar and analysts say all graphs point down for the UK currency if it breaks lower.
The pound has remained resilient in recent weeks but fresh economic headwinds are dictating a new push toward quarter-century lows against a broadly bullish dollar.
The catalyst for that may come when the Bank of England embarks on unconventional measures to keep UK borrowing costs low, having almost run out of interest rate ammunition to stave off the threat of deflation.
The UK currency is already back on the defensive and poised to break below $1.40 as investors await the Bank of England's next rate decision on Thursday, where it is seen slashing rates by another 50 basis points to just 0.5 percent [BOE/INT].
Economic fundamentals provide little support and technical
analysts who study historical charts to predict future moves
also say a fresh bout of weakness could quickly take
sterling/dollar
"The environment we're in of despair and desperation in terms of the economic outlook are set to persist for a while," Standard Bank head of G10 currency research Steve Barrow said.
"Sterling could fall to lower levels against the dollar, down towards the $1.30 area in the next few months," he added.
The outlook for sterling against the euro is muddied by the pressure the single currency is coming under due to euro zone banks' exposure to trouble in eastern Europe, but against the dollar -- seen as a relatively safe haven -- the only way is down.
Sterling broke lower on Monday, piercing key support below
the $1.40 mark and exposing pivotal support at $1.3850. It was
last quoted at $1.4110
"I'm pretty confident that $1.3850 will be tested," said Thomas Anthonj, technical currency analyst at RBS.
"If you take that out then you are immediately heading for fresh lows and that could be around about $1.29-ish, which is a big Fibonacci support in the really long term chart."
Once the pound breaks below its January level, analysts warned of a lack of technical support that could allow it to fall steeply.
The investor Jim Rogers -- although well-known as a sterling bear -- declared in January that the pound was "finished" and it could fall near parity with the dollar in the coming years [ID:nSP179159].
But George Soros, famous for driving Britain out of the European Exchange Rate Mechanism in 1992, has warned that the risks of shorting sterling increase significantly when the currency falls below $1.40. [ID:nWLA6103].
TAPS TO OPEN
A major cause of uncertainty is just how much the BoE and UK Treasury are prepared to spend to boost money supply, and what impact that might have on the pound.
Quantitative easing is when a central bank floods the banking system with masses of money to shore up financial systems and promote lending. One by-product of this is likely to be a weaker currency, particularly if it takes a long time to filter through to stimulate economic growth, encouraging investors to look elsewhere for yield.
Details on any unconventional measures are likely to accompany the central bank's announcement on interest rates on Thursday.
The central bank voted unanimously in February to ask finance minister Alistair Darling for permission to begin quantitative easing, which it would do either by buying government bonds or corporate assets.
Darling was quoted on Tuesday as saying the BoE could start buying assets this week with newly created money [nL372258].
"We know from the BoE minutes that it plans to buy gilts -- it is all about the details of that strategy, but it is not a positive for sterling one way or another," Bank of New York Mellon currency strategist Neil Mellor said.
EURO/STERLING PARITY OFF AGENDA?
Credit Suisse currency strategist Ray Farris said a BoE quantitative easing programme also carries the risk of paying foreigners for sterling assets, weakening sterling by prompting them to convert the proceeds into other currencies.
"Probably the easiest place for the BoE to buy gilts, at least initially, is from foreigners," he said. "A lot of the stock of gilts in the UK is held by investors who are long-term holders and are unlikely to be willing sellers."
He saw sterling at $1.3760 on a three-month horizon, adding that the pound could also weaken against the euro to around 93 pence, simply because monetary policy is set to be more expansionary in the UK than in the euro zone.
While the outlook for sterling against the dollar is universally negative, opinions are divided over the euro/sterling pair and the prospect for another run at parity.
Standard Bank's Barrow sees the pair at 85 pence in 3-6 months, but noted there may be reasons for believing parity was still possible.
"If you forecast on the basis that the trade account is not really improving and the mushrooming of the budget deficit implies substantial strains on the current account deficit, then sterling will go down a lot more," he said.
Others believe that sterling's peak against the euro was reached when it came close to parity just above 98 pence at the end of last year.
"On euro/sterling I think we've seen the top and that we're going back down below 80 and 77 pence in the next six-to-nine months," said Steve Merrigan, technical currency analyst at CBCM.
(Reporting by Jessica Mortimer and Veronica Brown; editing by Patrick Graham)