October 9, 2013 / 8:58 AM / 5 years ago

Unexpected drop in factory output dents sterling

LONDON (Reuters) - An unexpected fall in British industrial output and a wider-than-expected trade deficit pushed sterling to a five-week low against the euro and a three-week trough against the dollar on Wednesday.

The euro rose to 84.875 pence, its strongest since early September, while the pound fell to a four-week low against a trade-weighted currency basket of 82.3.

Data showed British industrial output fell by 1.1 percent on the month in August, the biggest drop since September 2012, calling into question how much the U.K. economy can go on strengthening after a recent run of above-forecast data.

“The plunge in industrial production has put a major question mark over the U.K. economic recovery,” said Lena Komileva, managing director of G+ Economics.

“But the drop is unlikely to define a new trend,” she added.

A run of above-forecast numbers lifted sterling nearly 8 percent against the dollar between early August and early October as investors brought forward their expectations of when U.K. interest rates would rise.

Analysts said the pace of sterling’s rise had left it vulnerable to any downturn in British economic data.

The pound fell 1 percent against the dollar to $1.5923, its lowest since September 18. It fell below chart support at $1.5965, the point on a trendline drawn from the lows in early and late August, which chartists said pointed to room for further falls.

Other figures on Wednesday showed Britain’s goods trade deficit narrowed less than expected in August. The National Institute of Economic and Social Research estimated the U.K. economy grew by 0.8 percent in the third quarter, less than the 0.9 percent it estimated for the three months to August.

“After the relatively strong UK data released through the later stages of summer, this might come as something of a shock to markets previously doubting the Bank of England’s forward guidance policy and stance on interest rates,” said Alex Edwards, head of corporate desk at UKForex.

RATE HIKE EXPECTATIONS

Recent strong data had prompted investors to start pricing in a possible rate hike much earlier than the BoE’s timeline of end-2016.

But Wednesday’s data encouraged investors to rethink this view. The 18-month sterling overnight interbank average rate (SONIA) was last at 0.4962 percent, down from 0.5215 percent three weeks back.

The BoE bank rate is at 0.5 percent and a SONIA rate above that indicates the market is pricing in the risk of a hike.

The BoE starts its two-day policy meeting on Wednesday, with a decision due on Thursday when it is expected to leave rates unchanged.

Richard Falkenhall, currency strategist at SEB, said more weak economic data would have an adverse impact on sterling.

“We recommend to sell GBP/USD at the current level targeting the $1.52-1.54 level,” he said. “We place the stop on this trade at $1.6280, which is above last week’s high, as a break above would confirm that we remain in a bullish trend.”

Additional reporting by Anirban Nag, editing by Gareth Jones

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