Sterling fell below $1.50 for the first time since July 2010 on Friday after data showed Britain's manufacturing sector suffered a shock contraction in February and raised expectations of more monetary easing in the near term. Speculation is growing that the grim state of the British economy will prompt the Bank of England to resume its asset buying programme as early as next week.
February's manufacturing PMI came in well below the line separating growth from contraction and was also far below the lowest forecast in a Reuters poll. The pound fell as far as $1.4998, its lowest since July 2010, erasing an option barrier at $1.50. It was last around 1 percent down on the day at $1.5014 and was on track for its third straight week of losses.
The euro was last up 0.5 percent on the day against the pound at 86.49 pence. It had risen to a session high of 86.855 pence after the manufacturing survey data. "This (PMI) data was a trigger for people to reconfirm their views that sterling is coming down and to re-enter those short sterling/long dollar bets," said Geoffrey Yu, currency analyst at UBS.
Yu said UBS had a trade recommendation to sell sterling/dollar with a strike at $1.48, adding that any negative surprises in UK data would continue to hurt the pound. Separately, the BoE released figures showing British mortgage approvals for house purchases suffered a surprise drop in January and mortgage lending was weak. Analysts said investors would look to UK construction and in particular services PMI data due on Monday and Tuesday for further indication on domestic growth.
Sterling has lost 7.6 percent against the dollar so far this year and was hurt earlier this week after Moody's stripped Britain of its triple-A rating. Analysts at Morgan Stanley said in a note sterling could remain weak given the UK's more flexible approach to inflation targeting and a subsequent rise in inflation expectations. The pound's outlook remains bleak with a growing likelihood the BoE will restart and expand its stimulus programme.
Against the euro, strategists said sterling could recoup some of its losses if conditions in the euro zone worsened. In the options market, near term euro/sterling risk reversals were trading in favour of euro calls, or bets that the shared currency will gain, while at the longer end there was a renewed bias for puts, or bets that it will weaken. "On an evaluation perspective sterling is not particularly undervalued, markets are not heavily positioned short sterling, so there is certainly scope for further downside," said Daragh Maher, FX strategist at HSBC.
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