Pound Slides as Weak U.K. Factory Data, Political Risks Weigh

(Bloomberg) -- The pound started the fourth quarter on a weak footing as slowing U.K. manufacturing growth, together with questions about Brexit and the stability of Prime Minister Theresa May's leadership heading into the annual Conservative Party conference, weighed on sentiment.

Sterling dropped as much as 1 percent versus the dollar to reach a two-week low and weakened against all of its Group-of-10 peers. The U.K.'s manufacturing PMI fell to 55.9 for September from a revised 56.7 a month earlier, data showed earlier Monday. The data came after a report on Sept. 29 confirmed second-quarter economic growth was the slowest in four years on an annual basis.

The pound fell against the dollar for the sixth time in seven days after the latest round of divorce talks between Britain and the European Union showed little signs of making progress, and PM May went into her party's yearly gathering with her allies fearing she faces plots from supporters of cabinet rivals. The Conservative meeting will be watched for any signs of a rebellion from Foreign Secretary Boris Johnson, who has challenged the prime minister's Brexit strategy in recent weeks. 

Johnson's potential leadership bid is “significant and one of several reasons to be technically short sterling this week,” said Adam Cole, Royal Bank of Canada's chief currency strategist. Given PM May's more conciliatory Brexit tone, Johnson's hard stance would weigh on the pound, Cole said, adding that at “this level, it would take a lot” to go long sterling.

The pound traded 0.9 percent lower at $1.3277 as of 2:01 p.m. in London, having earlier touched $1.3260, the weakest level since Sept. 14. The currency surged 3.6 percent in September, boosted by expectations of a policy tightening from the BOE, with the market now pricing in two interest-rate increases by August.

Sterling weakened 0.4 percent to 88.58 pence per euro, while the yield on 10-year U.K. government bonds fell three basis points to 1.34 percent.

“The currency market is starting to price out some of the hawkish news from mid-September,” said Alan Clarke, an economist at Scotiabank. BOE policy makers seem “determined to hike in November, but it is going to require an improvement in the data to trigger another hike early in 2018,” he said.

--With assistance from Anooja Debnath

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Scott Hamilton, Keith Jenkins