Pound Bulls Get Reminder of Pitfalls as Factory Output Shrinks

  • Data comes day before BOE announce rates decision, outlook
  • Gilts stay lower before report with wage data due next week

The pound fell against the dollar, ending a two-day gain, after U.K. industrial production unexpectedly declined and exports slid the most in nine years, adding to signs of slowing momentum in economic growth.

Sterling weakened versus 13 of its 16 major peers. Coming a day before the Bank of England’s Monetary Policy Committee announces its interest-rate decision and releases minutes of its meetings, the data helped end the pound’s recovery that had pushed it on Tuesday to the strongest level in more than a week versus the dollar. Traders will have unemployment and wage-growth data to scrutinize next week, to assess the timing of the first interest-rate increase since 2007.

“We had fairly soft expectations for this manufacturing data, and it was even weaker than that,” said Michael Sneyd, a foreign-exchange strategist at BNP Paribas SA in London. “The MPC’s focus at the moment is really on the labor market and in particular the wage data. That will be a key event for sterling. In terms of tomorrow’s meeting, there hasn’t really been enough development to cause the MPC to dramatically change its view.”

Sterling dropped 0.2 percent to $1.5373 as of 4:34 p.m. London time, after jumping 1.5 percent over the previous two days. The pound appreciated 0.3 percent to 72.55 pence per euro, and touched 72.40 pence, the strongest level since Aug. 21.

At last month’s MPC meeting, only Ian McCafferty voted to increase rates, minutes released on Aug. 6 showed. The vote was 8-1.

Total production fell 0.4 percent in July, the Office for National Statistics said in London on Wednesday, missing the median of economists’ forecasts for a 0.1 percent increase. Sales of British goods abroad fell 9.2 percent, contributing to the biggest drop in factory output since January.

Factories, Services

The reports follow the release last week of factory and services surveys that missed analyst estimates. That fueled speculation the officials may adopt a dovish tone when they discuss the appropriate timing for raising official borrowing costs. Forward contracts based on the sterling overnight index average, or Sonia, suggest that a full 25 basis-point increase won’t come until August 2016.

There’s “plenty of scope” for investors to reconsider their forecasts for the pricing of the first rate increase, if there is an acceleration in wage growth, and that may prompt traders to rebuild bullish bets on sterling, said BNP’s Sneyd, who favors buying the pound against the Australian dollar and euro.

U.K. government bonds dropped, with the 10-year yield climbing three basis points, or 0.03 percentage point, to 1.87 percent. The 2 percent gilt due in September 2025 fell 0.255, or 2.55 pounds per 1,000-pound face amount, to 101.21.

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