Sterling hit as UK factory output slides unexpectedly

LONDON: Sterling fell against the dollar and the euro on Tuesday after data showed British industrial output contracted unexpectedly in October and manufacturing output tumbled by the most since May.

Output for industry overall fell 0.1 percent after a strong September, the Office for National Statistics said on Tuesday. Manufacturing output dropped 0.7 percent, hit by a sharp fall in computer, electronic and optical products.

That reinforced expectations that interest rates in Britain are likely to stay low for quite some time. Investors do not expect the Bank of England to increase rates until late next year or early in 2016.

Sterling fell to $1.5638 after the data, from around $1.5663 before its release, down 0.1 percent on the day and not far from a 15-month low of $1.5541 hit on Monday.

"The market has been trying to push UK rate hike expectations further into the future, but it seems that even as it does that, we still manage to come up with disappointing numbers that force you to (push them out) even further," said Daragh Maher, a currency strategist at HSBC.

Maher added that in a day without much other meaningful data, the market had probably paid more attention to the UK numbers than would normally be the case.

Earlier, sterling had strengthened after data showed that a "Black Friday" shopping spree pushed British retail sales growth to a three-month high in November.

The pound has underperformed the dollar in recent months on expectations the Federal Reserve will hike rates before the BoE.

The yield gap between two-year U.S. Treasuries and British gilts hit its widest since September 2012 on Monday, Reuters data showed, helping underpin the dollar.

The euro strengthened after the output data to the day's high of 78.95 pence, up 0.3 percent.

"From a quarter-ahead perspective we believe euro/sterling shorts are attractive as the view could benefit from both further easing by the ECB (European Central Bank) and some positive re-pricing of BoE rate expectations in early 2015," wrote BNP Paribas analysts in a note.