Sterling struggles near seven-year low against dollar

Sterling struggled near a seven-year low against the dollar on Tuesday, with data showing the weakest British manufacturing growth in three years contrasting with equivalent US data that supported expectations for higher interest rates. The pound has suffered an aggressive sell-off over the past three months, suffering an almost 9 percent fall on a trade-weighted basis, its worst performance in seven years , driven largely by worries that Britons may vote to leave the European Union in a referendum on June 23.
A key concern for investors is that a "Brexit", as well as further pushing back UK rate hike expectations, would threaten the huge foreign investment flows Britain needs to balance its current account deficit, one of the biggest in the developed world at around 4 percent of output. Tuesday's factory growth numbers, which were lower than all forecasts in a Reuters poll, raised a warning signal that the country's recovery from the financial crisis could be slowing further.
"The global slowdown and the uncertainty surrounding the 'Brexit' referendum possibly weighed on (UK) manufacturing activity," said IronFX analyst Charalambos Pissouros. "Further weakness in incoming British data ... is likely to keep the pound under selling interest." By 1615 GMT sterling was trading flat on the day at $1.3919, less than a cent away from a seven-year low of $1.3836 struck on Monday. Though the US numbers showed manufacturing activity contracted for a fifth straight month in February, there were signs the embattled sector was stabilising.
But with so much bad news already reflected in sterling's value, with investors now pricing in a chance of a rate cut and no hikes for the rest of the decade, analysts said it would take more than another set of weak data to push the currency much lower than its current levels.
"When you think about how little hiking has been priced in and, to some degree, even (rate) cuts, then is another bit of softer data really going to make a huge difference?" said HSBC currency strategist Dominic Bunning. "The bias of the market is already short sterling and is already looking for the Bank of England to remain very dovish." Against the euro, the pound was up 0.3 percent at 77.91 pence. Swiss bank UBS said on Monday sterling could be dragged down to parity with the euro if Britain voted to leave, to which the bank assigns a 40 percent chance.