LONDON: Sterling trod water on Monday after a survey painted a subdued picture of Britain's manufacturing sector, underpinning the view that a recession could hit in the near future and that the Bank of England will need to further ease monetary policy.
Sterling has tumbled almost 12 percent against the dollar since Britons voted to leave the European Union last month. Investors are worried that "Brexit" will have negative consequences on the economy and in particular Britain's already huge current account deficit, which will widen further if investment flows dry up.
Last week the first concrete signs emerged that the vote might be starting to take a toll on the already slowing economy, with a survey from Markit suggesting business activity is declining at the fastest rate since 2009.
Monday's CBI Industrial Trends report showed optimism among British manufacturers fell in July to its lowest level since the nadir of the financial crisis in early 2009, even as output rose in the last three months.
"Once businesses become more familiar with Brexit uncertainty, which is likely to persist for a number of years, it appears reasonable to expect business confidence to gradually rebound ... although remain consistent with weaker economic growth," said Bank of Tokyo-Mitsubishi UFJ currency economist Lee Hardman.
By 1445 GMT sterling was trading flat on the day at $1.3108, having traded at $1.3156 before the report. Against the euro, the pound was also flat at 83.77 pence per euro.
Traders said any bounce in sterling would be likely to meet selling, with markets pricing in a chance of at least two rate cuts in the next six months.
Speculators have been selling the pound since the June referendum, with latest data showing net bets against the British currency at its highest since June 2013.
"We expect a combination of weak economic data and expectations for aggressive easing by the BoE in August will keep the pound under selling pressure in the near term," said Charalambos Pissouros, senior analyst at IronFX Global.
Sterling had been supported last week by hawkish comments from two BoE policymakers, before the release of the Markit purchasing managers' index (PMI) surveys.
Kristin Forbes said the BoE should not rush to cut interest rates, mirroring comments from Martin Weale, who said he was unsure if he would back a rate cut at the August meeting.
In contrast, though, the BoE said last week that most of the nine members of its Monetary Policy Committee expected to give the economy more help at that meeting.
"Even if there is still disagreement amongst members of the BoE Committee, the data available so far is likely to be sufficient for further monetary policy easing in August," said Antje Praefcke, currency strategist at Commerzbank.
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