Sterling edged higher on Tuesday after better-than-expected UK industrial and manufacturing data, although the numbers did little to alter expectations of more monetary easing that should check the pound's gains. UK manufacturing output fell 2.9 percent in June after a 1.2 percent rise in May, the data showed, but beat forecasts for a 4.1 percent fall on the month.
Industrial output dropped 2.5 percent, following a 1.0 percent increase in May, but did better than a forecast 3.4 percent decline. The numbers came a day ahead of the Bank of England's quarterly inflation report when the BoE is widely expected to slash its growth and inflation forecasts for 2012 and beyond. That would bolster expectations for more economic stimulus, in the form of quantitative easing (QE), later this year with the economy mired in recession.
"Sterling found some support versus the euro on this morning's data," said Jane Foley, senior currency strategist at Rabobank. "A weak set of June production data was published but the headlines were not as bad as feared." "This, however, is unlikely to be sufficient to counter speculation that the BoE will downgrade its growth projection. Since this would likely encourage talk of further QE later in the year, sterling is set to remain vulnerable into tomorrow's release."
More quantitative easing can weigh on the currency as it increases the supply of pounds in the system. The euro was down 0.2 percent at 79.32 pence, off a one-month high of 79.63 pence hit on Monday. Against the dollar, the pound was up 0.35 percent at $1.5660. The euro has recovered broadly in recent days on expectations the European Central Bank may take action to lower borrowing costs for Spain and Italy.
Analysts said this had led investors to shift focus back to poor UK economic fundamentals, w hich had previously taken a back seat as the market concentrated on euro zone debt problems. Surveys last week showed growth in Britain's dominant services sector slowed in July while manufacturing activity shrank.