June 11, 2018 / 8:19 AM / 2 months ago

Sterling falls after UK factory output shows biggest monthly drop since 2012

LONDON (Reuters) - Sterling slid against the dollar and the euro on Monday after British factory output suffered its biggest monthly drop since 2012, underlining that economic momentum remains fragile and will likely need to improve before interest rates are raised.

The new polymer 5 pound Sterling note featuring Sir Winston Churchill, is unveiled at Blenheim Palace in Oxfordshire, Britain June 2, 2016. REUTERS/Joe Giddens/Pool

Data published earlier on Monday showed manufacturing output dropped by 1.4 percent month-on-month in April after a 0.1 percent decline in March - a bigger drop than any economist had forecast in a Reuters poll, which pointed to growth of 0.3 percent.

The broader measure of industrial output fell 0.8 percent on the month, but was up 1.8 percent on the year - again, weaker than all forecasts.

“This is not the start (for the British economy) the market was hoping for in Q2,” said Kallum Pickering, a UK economist at Berenberg.

“It’s going to take the Bank of England more than one quarter” of decent economic numbers before it is ready to hike rates, Pickering said, predicting the central bank would next raise rates in November.

The disappointing data comes ahead of this week’s key British parliamentary vote on the EU withdrawal bill. Traders said signs of limited progress in talks between Britain and the European Union over Brexit continued to weigh on the pound.

After trading up 0.1 percent, the pound fell following the data release and traded down around 0.2 percent at $1.3386 in afternoon European trading.

The drop versus the euro was even more pronounced as the single currency was stronger across the board. The pound slumped as much as 0.6 percent to 88.31 pence per euro, not far from one-month lows of 88.375 pence hit last week.

The figures do little to support the view of BoE Deputy Governor Dave Ramsden, who last week said data so far had suggested the economy’s weak start to 2018 would prove temporary.

The Bank of England said in May that it did not intend to raise rates until it saw proof that the economy was stronger.

This week could prove a volatile one for the pound, with parliamentary votes on amendments to Britain’s EU withdrawal bill taking place on Tuesday and Wednesday.

Brexit headlines have returned to dominate sterling trading in recent days, with the EU chief negotiator last week questioning Britain’s “backstop” proposals to deal with the Irish border issue - a sticking point in moving forward negotiations for Britain and the EU’s divorce.

“It is very likely that this will not be the last of disappointing news from Britain. Tomorrow the markets will pay attention to UK employment data. A series of weak data, including today’s, noticeably reduces expectations from the labour market, but can further pressure the British currency if it fails to present a positive outcome,” FXPro said in a note.

Reporting by Tommy Wilkes; Editing by Alison Williams

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