LONDON: Sterling slipped to its lowest in more than 2-1/2 years versus the dollar on Friday after data showed Britain's manufacturing sector suffered a shock contraction in February, fuelling fears of a return to recession.
Growing concern about the British economy has also raised bets that the Bank of England will resume its asset buying programme, or quantitative easing (QE) as early as next week, and this could push sterling below $1.50 sooner than some had expected.
February's manufacturing PMI came in well below the line separating growth from contraction and was also far below the lowest forecast in a Reuters poll.
The pound fell as low as $1.5012, its lowest since July 2010, and was later down 0.8 percent at $1.5032. Traders cited stops below $1.5000.
The euro was up 0.6 percent on the day against the pound at 86.61 pence. It had risen to a session-high of 86.855 pence against the struggling pound after the manufacturing survey data.
Separately, the BoE released figures showing British mortgage approvals for house purchases suffered a surprise drop in January and mortgage lending was weak.
"Sterling fell on disappointing PMI data. It is holding above $1.50 for now but $1.48 is possible and it can trade even below that," said Daragh Maher, FX strategist at HSBC.
"On an evaluation perspective sterling is not particularly undervalued, markets are not heavily positioned short sterling, so there is certainly scope for further downside."
Sterling has lost 7.50 percent against the dollar so far this year and was hurt earlier this week after Moody's stripped Britain of its triple-A rating.
Analysts at Morgan Stanley said sterling could test $1.50 and a move below that will open the way to $1.4700/$1.4660.
Strategists said investors saw little reason to hold onto sterling given Britain's ratings downgrade and expectations the economy may tip into its third recession since 2008.
"We think hedge funds are sellers (of sterling) ahead of next week's BOE meeting with today's disappointing figures", said a portfolio manager at a London-based asset management firm.
BOE TO EASE FURTHER
The pound's outlook remains bleak with a growing likelihood the BoE will restart and expand its stimulus programme.
Governor Mervyn King and his deputy Paul Tucker have signalled they are open to more bond purchases and that the pound may need to weaken more for Britain to rebalance its economy.
A Reuters poll on Thursday showed that there is a growing chance that the BoE could resume its bond-buying programme next week.Quantitative easing is seen as negative for the currency as it increases its supply, thereby driving its exchange value lower.
"On the medium-term view we are bearish sterling, with the BoE acknowledging that inflation is going to be above target for some time and at the same time they were sounding relatively dovish ... that kind of combination is not good for sterling," said Saeed Amen, currency strategist at Nomura.
Against the euro, strategists said sterling could recoup some of its losses if conditions in the euro zone worsened.
In the options market, near term euro/sterling risk reversals were trading in favour of euro calls, or bets that the shared currency will gain, while at the longer end there was a renewed bias for puts, or bets that it will weaken.
Renewed worries about the euro zone after an inconclusive Italian election could prompt investors to seek the relative safety of UK gilts, as they did last year at the height of the crisis, which could cap the euro's gains against sterling.
Analysts said given the euro zone worries, investors are more likely to express a negative view on the pound against the dollar rather than the common currency.
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