April 3, 2017 / 9:05 AM / 2 years ago

Sterling skids after UK manufacturing loses momentum

LONDON (Reuters) - Sterling skidded on Monday after data showed British manufacturing lost momentum last month, the latest sign the economy may be running out of steam after its surprising resilience in the wake of last year’s Brexit vote.

A British ten pound banknote is seen in a photo illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration/File Photo

Sterling, whose 20 percent tumble since last June’s vote to leave the EU had helped manufacturers post their fastest growth in three years in the last quarter of 2016, fell back below $1.25 after the data, which showed growth in the sector slowed in the first three months of the year.

By 1635 GMT it was trading down 0.8 percent on the day at $1.2466.

Major banks are split over sterling’s direction in the coming months, with lenders such as Deutsche Bank calling for the pound to fall close to parity with the dollar, while others, like Barclays, suggest sterling will rebound to $1.38 in the coming months.

This split in opinion, said Mizuho’s head of hedge fund FX sales Neil Jones, was driving volatility in the currency.

Some traders and analysts say that now that the formal process in which Britain will depart the EU has been triggered, focus is returning from politics to fundamentals.

One of the main concerns around the economic effect of Brexit had been Britain’s huge current account deficit, which swelled to as high as 7 percent of GDP last year.

But data last week showed an almost halving of Britain’s current account deficit as a percentage of output, and a rise in foreign direct investment to 110 billion pounds, offering hope that one of the economy’s big vulnerabilities may be fading.

U.S. investment bank Goldman Sachs, however, said that although the data showed foreign investors remained optimistic about Britain’s medium-term prospects, they were also simply taking advantage of sterling’s weakness, and that the pound was still likely to fall over the next 12 months.

Strategists at the bank wrote in a research note that the pound would remain sensitive to the economic outlook, the Bank of England’s position on how to react to accelerating inflation, and the nature of exit negotiations between Britain and the EU.

“We continue to think that the currency will reflect more near-term considerations...than medium-term considerations of what a fair-value for sterling could be relative to its future current account position,” they wrote.

The manufacturing survey showed growth at a four-month low, with a third straight month of falls.

“What we’ve seen building this year is that we have the currency behaving in a normal, rational way – data surprises to the downside result in weakness and to the upside result in strength. That makes it an easier currency to deal with,” said Barclays currency strategist Hamish Pepper.

Data released on Friday from the Commodity Futures Trading Commission showed speculators trimmed their record-high bets against the pound in the week to last Tuesday.

Reporting by Jemima Kelly; Editing by Tom Heneghan

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