May 2, 2017 / 9:55 AM / 9 months ago

Strong manufacturing data gives sterling only brief lift

LONDON, May 2 (Reuters) - Sterling was given only a temporary lift by stronger-than-expected manufacturing data on Tuesday, with traders focusing more on developments showing the rest of the European Union taking a tough stance on Britain’s exit from the bloc.

On the first day of trading after a long weekend across Europe, sterling inched down against the euro and traded flat against the dollar, even after numbers showing UK manufacturing growth surged to a three-year peak in April, beating all forecasts.

The pound’s price movements, said traders and analysts, were still being driven primarily by political developments, particularly surrounding Brexit negotiations.

The other 27 EU members endorsed stiff divorce terms for Britain on Saturday and warned Britons to have “no illusions” that a deal to retain access to European markets will be swift and easy.

That was followed, on Sunday, by a report in Germany’s FAS newspaper of a difficult dinner between British Prime Minister Theresa May and the head of the European Commission, which increased fears that the two sides are talking past each other.

The commission’s president, Jean-Claude Juncker, was quoted saying he was “leaving Downing Street 10 times more sceptical than I was before”, in an account which suggested that he and May did not see eye to eye on a range of issues.

May dismissed the account as “Brussels gossip” on Monday.

“The one thing that changed this weekend were the reports from FAS on Sunday about how fraught the dinner last Wednesday was, and therefore what you’ve seen with sterling showing a degree of weakness is definitely a shift,” said Bank of New York Mellon’s head of currency strategy, Simon Derrick.

Sterling was still less than 1 U.S. cent away from a seven-month peak against the dollar, but was back below $1.29 by 0930 GMT, flat on the day. Against the euro, it was down 0.2 percent at 84.71 pence.

Data released on Friday showed speculators wound back their bets against the pound for a second week running in the seven days up to Tuesday.

Demand for sterling has increased since May called a snap election for June 8, with markets bettting that would bring political stability and could strengthen Britain’s hand in its exit negotiations with the EU.

“Politics continues to outpace economic indicators as a driver of the pound,” said Caxton FX analyst Alexandra Russell-Oliver. “More broadly, the pound has continued to see support off the back of an expected Conservative Party win in June’s snap elections.” (Reporting by Jemima Kelly; Editing by Mark Trevelyan)

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