July 2, 2018 / 8:24 AM / 5 months ago

Sterling slumps as Brexit crunch nears

LONDON (Reuters) - Sterling fell toward an eight-month low against the dollar on Monday after stronger-than-expected manufacturing sector data failed to temper investors’ concerns about a Brexit cabinet meeting later in the week.

A British Pound Sterling note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

The pound has slumped recently because of weakness in the economy, a resurgent U.S. dollar and fears that Prime Minister Theresa May will run out of time to agree a deal with the European Union for life after Britain leaves the bloc next year.

The currency weakened more than 6 percent between April and June, its worst quarter since the 2016 referendum to leave the EU.

By 1530 GMT, sterling was down 0.7 percent against the dollar at $1.3121, close to an eight-month low of $1.3050 hit on Thursday. It traded flat against the euro.

British factories kept up a steady pace of growth in June, PMI data showed on Monday, but that did little to boost the pound.

Instead, a broadly stronger dollar, and headlines about bickering within Prime Minister Theresa May’s party over plans for handling customs with the EU after Brexit, drove the currency lower.

“The previous meetings failed to unify the cabinet behind a Brexit plan, thus one cannot help but cast a sceptical eye this week,” said Societe Generale currency strategist Alvin Tan.

Data last week showed the economy’s slowdown in early 2018 was less severe than first estimated, but business and consumer surveys have painted a mixed picture of the second quarter.

Markets are pricing in an 84-percent chance of a single 25-basis-point increase by the end of 2018 and a 60-percent chance of an August rate hike.

Bank of England officials weighing up the next rise in interest rates have been keen to emphasise the more positive numbers.

But analysts are less sanguine.

The fragile nature of Brexit negotiations with the European Union and sluggishness in the economy will drag on sterling versus the euro in the coming months, UBS Global Wealth Management said in a note to clients.

Sterling has traded within narrow ranges against the euro since September last year but UBS said it had opened a short-term recommendation to sell the British currency against the euro in part because it thinks hawkish expectations around the Bank of England’s next steps will be disappointed.

“UK economic activity lacks the muscle to trigger a BoE hike in August in line with market expectations,” it said.

At a cabinet meeting on Friday, British ministers will try to agree on a common position on Brexit and discuss a new proposal for handling customs with the EU proposed by May’s advisers.

Reporting by Tom Finn; Editing by Louise Ireland

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