The pound fell to the lowest level in more than a year against the dollar after a report showed U.K. manufacturing growth unexpectedly slowed last month, reducing pressure on the Bank of England to raise interest rates.
Sterling weakened a second day versus the euro after the data based on a survey of purchasing managers showed overseas orders stagnated, highlighting Britain’s dependency on domestic demand. U.K. government bonds rose as investors scaled back bets on a rate increase after European Central Bank President Mario Draghi said he can’t exclude the risk of deflation in the euro area, Britain’s biggest trading partner.
“The pound fell today as the manufacturing PMI report was consistent with the latest trend in the U.K. data showing recovery but at a declining pace compared with market expectations,” said Athanasios Vamvakidis, head of Group-of-10 currency strategy at Bank of America Corp. in London. “U.K. data is still good. But given that inflation is also below expectations, we expect the BOE to take its time before raising interest rates.”
The U.K. currency dropped 1.3 percent to $1.5377 at 4:39 p.m. London time after sliding to $1.5368, the lowest since August 2013. Sterling depreciated 0.7 percent to 78.18 pence per euro after strengthening 6.5 percent against the common currency last year.
Wagers by hedge funds and other large speculators on the pound’s decline against the dollar exceeded those on a gain by 15,233 contracts in the week through Dec. 23, the first increase in three weeks.
Markit Economics said its manufacturing PMI fell to 52.5 from a revised 53.3 in November. A reading above 50 indicates expansion. Economists forecast the gauge would rise to 53.6 from a previously reported 53.5 in November, according to the median of estimates in a Bloomberg News survey of economists.
The data “provides further evidence of the ongoing slowdown in the U.K. manufacturing sector,” Rob Dobson, an economist at Markit in London, said in a statement. “The main weak spot remains exports, with overseas new order inflows stagnating and weaker economic growth in key markets and the ongoing lethargy of the euro area.”
The yield on 10-year gilts fell four basis points, or 0.04 percentage point, to 1.72 percent. The 2.75 percent bond due September 2024 gained 0.33, or 3.30 pounds per 1,000-pound face amount, to 109.14.
Two-year rates dropped three basis point to 0.42 percent, leaving the spread with 10-year yields to 130 basis points.
Draghi said in an interview with German newspaper Handelsblatt that the risk the ECB won’t be able to fulfill its mandate on price stability is higher now than it was six months ago. The next ECB policy meeting is on Jan. 22.
Germany’s 10-year yield fell four basis points to 0.50 percent, after reaching a record-low 0.492 percent.
Gilts returned 6.1 percent in the past three months, according to Bloomberg World Bond Indexes, beating a 1.7 percent gain in Treasuries as investors judged the Federal Reserve will raise borrowing costs before its counterparts in other developed markets.