The pound found itself on the ropes against the strengthening dollar again yesterday, weighed down by financial markets� belief that the Bank of England�s inflation report on Wednesday signalled cuts in UK interest rates.

The pound found itself on the ropes against the strengthening dollar again yesterday, weighed down by financial markets' belief that the Bank of England's inflation report on Wednesday signalled cuts in UK interest rates.

Sterling hit a fresh 22-month low of $1.8620 against the greenback during trading yesterday.

The pound was also under pressure from the euro yesterday morning. However, sterling strengthened later as the euro found itself constrained by European Union figures showing gross domestic product in the eurozone contracted in the second quarter for the first time since data for the single currency bloc were first collected in 1995. GDP in the now 15-nation eurozone contracted by 0.2% between the first and second quarters.

The euro, which was launched in January 1999, pushed up as far as 79.92p early in yesterday's session. It had by last night fallen back to around 79.25p, down about half-a-penny on the session. The euro has climbed from below 67p in July last year.

Sterling was last night trading around $1.8675, down slightly from its $1.8683 close in London on Wednesday and more than three cents adrift of its finish on Tuesday, the eve of publication of the inflation report. The pound traded above $2 as recently as last month.

Currency experts are divided on the outlook for the pound.

The Bank of England's inflation report predicted that UK economic output would stagnate "over the next year or so". Bank Governor Mervyn King highlighted the "possibility of a quarter or two of negative growth".

The report showed the Bank's Monetary Policy Committee now expects benchmark annual UK consumer prices index inflation to be below its 2% target on its chosen two-year time horizon, after peaking at or above 5% in the near term. However, the MPC considers the risks to its medium-term inflation projection lie to the upside.

Adam Cole, head of currency strategy at Royal Bank of Canada, said of the inflation report: "I think that may well prove to be the trigger for a period of sterling under- performance for a slightly longer term, not just a one-day move. Having had three or four months of relative stability for sterling, we may be going into a slightly more rocky period again."

Cole expects the euro to rise as far as 82p against the pound - which would be a fresh record for the single currency.

He added: "For cable (sterling-dollar), to be honest it has been falling so quickly we have been struggling to keep up with it."

Cole is forecasting the pound will, by September 30, have fallen further from current levels to $1.84. He then sees a further fall to $1.73 by the year-end.

He said: "That is as much a dollar-positive story as it is sterling-negative. You have got both (an) independently weak pound and the strong dollar."

But Neil Parker, currency strategist at Royal Bank of Scotland, believed financial markets had misinterpreted the inflation report in coming to their conclusion that it signalled cuts in UK base rates, which are currently at 5%.

He said: "To be honest, the market's reaction to it (the inflation report), it was a total over-reaction I cannot understand why the markets think, when inflation is going to be above target for the remainder of this year, that the Bank of England is going to be cutting interest rates.

"What they misinterpreted from the Governor's statement, and the comments from the press conference afterwards, was what he was saying is (the MPC) thinks inflation will be below 2% at the end of the two-year time horizon but all of the risks to that forecast are on the topside."

Parker considered this as clear a signal that the Bank could give that it was going to sit on its hands "without actually saying they are going to sit on their hands".

He added: "Do we think there is much more downside in sterling? Probably not. We called $1.86 as the low. It reached $1.86 and change (on Wednesday). I don't think we are going to go through there ($1.86) without a big fight. Sterling is not the strongest of currencies but I don't think I would want to short it against one that is as weak, economically, as the US's is."

And Parker did not consider the euro's prospects to be bright, following its recent rapid rise against other major currencies.

He said: "Is the euro a good bet at the moment? I don't think so. I really don't."

Parker believed the European Central Bank's stance of talking "tough" on interest rates "is going to backfire", contending that many businesses and consumers in the eurozone were "panicked by conditions that are facing them".

Noting the eurozone economy was going to have high inflation and, at best, minimal growth, he asked: "Is that an economy you want to invest in?"

Parker noted "there is a lot of money that has piled into the eurozone" and believed this meant central banks and sovereign wealth funds were probably overweight in euro assets.

He added: "The euro is going to be under pressure, not just against the US dollar but also against the likes of the yen and the pound I think it (the euro) has done far too much, far too quickly. It think it will suffer now because of the poor performance of the eurozone economy."