Pound Retreats From 22-Month High Versus Euro Before PMI

The pound weakened for a second day against the dollar after an industry report showed U.K. manufacturing growth slowed more than economists forecast, reducing demand for Britain’s assets.

Sterling fell versus most of its 16 major counterparts as the Purchasing Managers’ Index survey followed data last week showing the U.K. economy slipped back into a recession last quarter. The pound extended losses versus the greenback after U.S. manufacturing unexpectedly expanded in April at the fastest pace in 10 months. Gilts were little changed as the government sold 3.75 billion pounds ($6.1 billion) of seven-year notes.

“The PMI data clearly weighed on sterling,” said Jane Foley, a senior currency strategist at Rabobank International in London. “There’s some clear profit-taking in sterling, as it’s come a long way against both the euro and dollar.”

The pound dropped 0.1 percent to $1.6221 at 4:28 p.m. London time after climbing to $1.6302 yesterday, the highest level since Aug. 31. Sterling was little changed at 81.52 pence per euro after falling as much as 0.5 percent.

The index of U.K. factory output, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, fell to 50.5 last month from a revised 51.9 in March. Economists surveyed by Bloomberg News predicted a decline to 51.5. A reading above 50 indicates expansion.

The U.K. economy unexpectedly shrank in the first three months of the year, according to data published April 25, pushing the nation into its first double-dip recession since the 1970s. Gross domestic product fell 0.2 percent from the fourth quarter of 2011, when it declined 0.3 percent, the Office for National Statistics said.

‘Very Anxious’

A gauge of services activity based on a survey of purchasing managers will drop to 54.1 for April from 55.3 in March, according to the median estimate of economists before the May 3 report.

“The market will be very anxious to see the PMI services report,” Rabobank’s Foley said. “Lots of people are skeptical about last week’s GDP numbers. As long as these numbers leave scope for economists to question the depth of the bad GDP data, then sterling will see buyers at lower levels.”

The pound has gained 1.4 percent in the past month, the third-best performer after the yen and Canadian dollar of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar was little changed, and the euro dropped 1.1 percent.

The Institute for Supply Management’s U.S. factory index climbed to 54.8 from 53.4, the Tempe, Arizona-based group’s report showed today. The median forecast in a Bloomberg survey was for a drop to 53.

‘Small Pullback’

The pound is poised to consolidate against the dollar, Commerzbank AG said, citing trading patterns.

“We would allow for a small pullback,” Karen Jones, head of fixed-income, commodity and currency technical analysis in London, wrote in a note to clients. “There is scope for $1.6110-$1.6050 ahead of further gains.”

Those levels represent the 38.2 percent and 50 percent Fibonacci retracement of the pound’s rally since the start of April, Jones said. Fibonacci analysis is based on the theory prices rise or fall by certain percentages after reaching a new high or low.

The Debt Management Office sold gilts maturing in March 2019 at an average yield of 1.495 percent. Investors bid for 1.79 times the amount allotted.

The 10-year gilt yield was at 2.11 percent. The 4 percent bond due in March 2022 traded at 116.77 percent of face value.

Gilts have handed investors a loss of 1.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries rose 0.2 percent and German bunds gained 1.4 percent.

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