October 2, 2017 / 1:49 PM / 9 months ago

Long sterling bets crushed on weak data, Brexit worries

LONDON (Reuters) - Sterling fell one percent to a three-week low on Monday as manufacturing surveys added to a string of recent data releases showing the British economy was struggling to gain momentum.

Pound coins are seen in this photo illustration taken in Manchester, Britain September 6, 2017. REUTERS/Phil Noble/Illustration

Investors took profits after the pound posted its biggest monthly performance in two years in September as expectations rose the Bank of England’s rosy outlook on the economy was at odds with underlying data and as governing Conservatives gathered for what could be a fraught party conference.

Markets focused on Brexit negotiations after Britain’s junior Brexit minister said he was hopeful that EU negotiators would agree to move on to discuss future relationships in October, even after the head of the European Commission said it would take “miracles” for that to happen.

“We have been a bit sceptical about the positive noises emerging from the Bank of England on the economic outlook and that conviction has been borne out of the recent data prints,” said Daniel Loughney, a fixed income portfolio manager at AllianceBernstein.

Monday’s data showed manufacturing growth in Britain cooling in September as cost pressures rose. Data on Friday showed gross domestic product growth slowed to 1.5 percent year on year in the second quarter while the current account deficit increased more than expected. and

“Markets have priced in about one rate increase but given the state of the economy, it is very difficult to see how can they increase interest rates a few more times.”

The soft streak in data came at a time when long positions in sterling flipped into positive territory for the first time in a year, indicating the latest weakness in sterling may have more room to run as market positioning was more neutral.

“Sterling has come off its highs with the current Tory Party conference the focus of investors,” Morgan Stanley strategists wrote in a daily note, saying the pound was a sell due to political risks and weak UK economic balance sheets.

From a technical perspective, there seems to be little respite for the pound. Against the dollar, sterling broke below a 20-day moving average on Monday and is trading at a key technical level - the 50 percent line of the 2016 high to low trading range.

FXTM strategists said a decisive break below and close below the $1.33 line may push it down to $1.3150 levels.

Even against the euro which has been hit by Sunday’s violence-marred independence referendum in the Spanish region of Catalonia, sterling weakened half a percent to 88.60 cents per euro indicating profit-taking was rife.

For a graphic on GBP positions click on this link reut.rs/2y4RfhF

Reporting by Saikat Chatterjee; editing by John Stonestreet and Louise Heavens

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