February 2, 2015 / 10:52 AM / 3 years ago

Sterling slides after data fail to lift mood

LONDON (Reuters) - Sterling fell against the dollar and euro on Monday after reports showed British manufacturing grew more than expected in January and factories cut prices as the cost of oil plunged.

The pound has struggled this year amid concern UK economic growth is slowing and political risk from elections in May, which may undermine effort to deal with a twin-deficit problem.

A monthly index of sentiment among manufacturing purchasing managers rose to 53.0 from 52.7 in December, boosted by export orders. That was above the 50 level indicating growth and beat a consensus forecast of 52.6.

The figures suggest manufacturing output is rising around 0.2 percent a quarter, according to survey compiler Markit, up from 0.1 percent in the last three months of 2014.

"Overall there are so many negatives on sterling at the moment that I'm still seeing it as a sell on any rallies," said Ian Stannard, head of European FX strategy at Morgan Stanley in London.

"I'd watch euro-sterling, though," he added. "If we do get a flow out of the euro zone looking for some of the substantial extra yield available on gilts in the context of ECB quantitative easing, then the picture may be a bit different."

Ten-year British government bonds fell from Friday's record high, ending a four-day rally and giving back some of their gains against their German equivalents. Ten-year gilt yields rose almost 5 basis points to 1.38 percent, up from a record low of 1.337 percent on Friday. Their spread over German Bunds widened by more than 4 basis points to over 106 basis points.

Sterling was a third of a percent lower on the day against the dollar, holding just above $1.50, a level it has found hard to break over the past week. It fell 0.7 percent to 75.44 pence per euro.

Monday's data also showed prices paid by UK manufacturers for raw goods fell at the fastest rate since May 2009, after oil prices more than halved over the last six months to less than $50 a barrel. That led producers to cut their prices for the first time in 19 months, at the fastest pace since September 2009.

"There's just too many factors such as disinflation, slowing domestic growth and constantly delayed interest rate expectations pushing away investor attraction to the pound," said Jameel Ahmad, chief market analyst at FXTM.

Sterling has fallen around 11 percent in the past six months as investors have pushed into next year expectations for when the Bank of England will raise rates. They will be watching the bank's Inflation Report next week for more clues.

Additional reporting by David Milliken; Editing by Larry King

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