Sterling hits three-week low

Sterling fell to a three-week low against the dollar on Monday, erasing all the gains it had made since last month's national election, after data showed the British manufacturing sector grew at a much slower pace than expected in May. The Markit/CIPS manufacturing Purchasing Managers' Index (PMI) rose to 52.0 in May from a downwardly revised 51.8 in April, but that was lower than the increase to 52.5 forecast by a Reuters poll of analysts.
That added to the belief that the Bank of England is likely to keep interest rates lower for longer, an expectation that dragged down the pound. Sterling fell to $1.5198, its lowest in since May 7, and down from $1.5270 before the data was released. "Even though it was a moderate improvement from April, expectations of a broad rebound in UK economic growth in the second quarter are called into question by two successive low readings," said Sakis Paraskevov, an analyst at IronFX Global.
On the other hand, the dollar was bolstered by robust manufacturing numbers. The Institute for Supply Management (ISM) said its index of national factory activity was 52.8 in May, up from April's reading of 51.5, which had tied with March's reading as the lowest since May 2013. The reading topped expectations of 52.0 in a Reuters poll of economists. The euro rose to 71.77 pence from 71.54 before the British PMI survey was released. But the single currency was weak overall after Greece missed a self-imposed Sunday deadline for reaching an agreement with its lenders to unlock aid, keeping alive fears of a debt default.
Despite the euro's woes, sterling is suffering its worst run in nine months, falling for seven consecutive days against the dollar, as recent data has fallen short of expectations while many investors have fretted about a possible British exit from the European Union. The pound had rallied after the centre-right Conservatives unexpectedly triumphed in the May 7 vote with an overall majority. But since peaking at $1.5815 a week later, it has shed 3.5 percent as the Conservatives' promised referendum on EU membership has come into focus.
Prime Minister David Cameron's government introduced a law in parliament on Thursday to guarantee that the referendum will be held by the end of 2017. It also disclosed the question voters will be asked, making it "Yes" to stay in, "No" to leave. Net short positions against the pound increased to 25,539 in the week to May 26, compared with 23,362 a week earlier, indicating that speculative bets against the currency were on the rise. "There is still some room for sterling to drop," said John Hardy, head of FX strategy, at Saxo Bank. "We could see it test $1.50-$1.51 before the US payrolls data on Friday."