Pound struggles against dollar

Sterling struggled near a seven-year low against the dollar yesterday, 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% fall on a trade-weighted basis, its worst performance in seven years, driven largely by worries that Britons may vote to leave the EU 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 4% of output.

Tuesday’s UK factory growth numbers 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,” he said.

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.

Against the euro, the pound was up 0.3% at 77.91 pence.

Though the US numbers showed manufacturing activity contracted for a fifth straight month in February, there were signs the embattled sector was stabilising.