LONDON: Sterling pulled back on Monday from highs against the dollar hit late last week, as a manufacturing sector survey brought more worrying signs on the economy ahead of a Bank of England meeting expected to cut interest rates to a new record low.
The survey of purchasing managers for July had been forecast to replicate the results of a one-off flash poll two weeks ago but was instead slightly worse, another hint of a growing economic backlash from June's Brexit vote.
The pound has recovered some ground since a dramatic 14 percent fall after the vote on June 23 to leave the European Union, and it gained more than 1 percent on Friday to trade above $1.33, helped by a disappointing batch of U.S. growth data.
The prospect of the Bank of England cutting base rates below those in the United States for the first time in a decade - and possibly adding to its dormant programme of quantitative easing - may weigh on the currency into Thursday's decision.
But a cut at least looks largely priced in, and a number of major banks said the dollar looked vulnerable to another squeeze after Friday's data.
"Action by the BoE is fully anticipated by the market, with the overnight swaps rate pointing to a cut of over 30 basis points being priced," said Derek Halpenny, European head of global market research at Bank of Tokyo-Mitsubishi UFJ.
"More aggressive action than simply a cut and some changes to Funding for Lending will probably be required in order to weaken the pound against the dollar, especially given the worsening of dollar sentiment."
Despite the dip following the PMI survey, the pound traded less than 0.1 percent lower at $1.3209. Against the euro, it was flat at 84.54 pence.
Since its drop after Britain's shock vote to leave the European Union five weeks ago, the pound has recovered about 4 percent, proving much more resilient than most major banks had forecast. Derivatives market indications of its future value are now far more balanced.
That is despite a raft of data suggesting that confidence in the economy has fallen sharply in the wake of the Brexit vote, and that Britain could be heading for a recession.
The latest figures - showing that British consumer morale suffered its sharpest drop for more than 26 years in July - had little impact on the currency on Friday.
"We have certainly seen a normalisation of risk reversals and even implied volatility has come down significantly, which suggests the process of unwinding the pre-Brexit GBP shorts ... is close to complete," said Javier Corominas, head of economic research and FX strategy at Record Currency Management.
"Going forward, the market is increasingly going to ask itself what is the level of sterling consistent with a sustainable current account path for the UK. This will be highly path-dependent and driven by Brexit negotiations in large part."
Almost all analysts polled by Reuters believe the bank will cut rates by a quarter point from the current record low of 0.5 percent. A slim majority believe the BoE will hold off from announcing more quantitative easing (QE) for now, but many think that will be part of a stimulus package.
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