Pound Weakens as Factory Output Drop Adds to Dovish BOE Outlook

  • Manufacturing production dropped 0.4 percent in October
  • Pound falls versus most major peers before BOE meets Dec. 10

The pound dropped for a third day against the dollar after a report showed U.K. factory output fell more than economists forecast in October, while industrial production barely grew.

The U.K. currency weakened against most of its major peers, falling for the first time in three days against the euro, as the data added to the reasons the Bank of England may hold off raising interest rates.

Central bank Governor Mark Carney first said in July that the timing of when to tighten will become clearer around the turn of the year. Since then officials cut growth and inflation forecasts while highlighting the drag to price growth by the strength of the pound as evidence to support keeping rates on hold. BOE officials will announce their latest policy decision on Dec. 10.

“It doesn’t feel like we are any closer to that rate hike now than we were in August, that is on the back of weaker data, which is at least in part a function of sterling’s strength,” said Jane Foley, a senior currency strategist at Rabobank International in London. “There was that soft patch in manufacturing during the summer, it seemed to improve and now it’s fizzled out again. Sterling has done some monetary tightening already, it suggests the BOE need not be in any rush to hike rates.”

The pound fell 0.4 percent to $1.5001 at 4:58 p.m. London time, having declined 0.6 percent in the previous two days. Sterling slid 0.7 percent to 72.48 pence per euro.

Even after Tuesday’s decline, the pound has still strengthened against the majority of its Group-of-10 peers this quarter. The BOE has kept interest rates at a record-low 0.5 percent since March 2009.

Trimmed Forecasts

Manufacturing production dropped 0.4 percent, after climbing a revised 0.9 percent in September, the Office for National Statistics in London said. The median forecast of economists in a Bloomberg survey was for a 0.2 percent decline. Total industrial production rose 0.1 percent, the ONS said.

When the central bank trimmed its forecasts for growth and inflation in the November Inflation Report, it also suggested risks from emerging markets had intensified. Consumer prices in the U.K. fell an annual 0.1 percent in October. The central bank targets growth of 2 percent.

The five-year break-even rate, a gauge of market inflation expectations derived from the yield difference between U.K. government bonds and index-linked securities, fell to the lowest level in more than three months.

U.K. government bonds fell as the nation auctioned 2 billion pounds of 30-year gilts. The securities were sold with an average yield of 2.49 percent, the highest since July.

Benchmark 10-year gilt yields rose two basis points, or 0.02 percentage point, to 1.82 percent. The 2 percent security due in September 2025 fell 0.17 or 1.70 pounds per 1,000-pound face amount, to 101.585.

“We expect the pound to remain subject to downside risk, especially as the BOE may reiterate the more dovish message of the latest inflation report,” Credit Agricole SA’s strategists, led by Valentin Marinov, head of Group-of-10 currency research at the bank’s corporate and investment-banking unit in London, wrote in a note to clients. Medium-term inflation expectations “have been falling of late, mainly in reaction to weakening investors’ U.K. growth expectations.”

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