Manufacturing survey thwarts sterling recovery

Sterling lost ground against both the dollar and euro on Tuesday after a weaker-than-expected survey of manufacturing sentiment added to arguments for another prolonged hold of Bank of England interest rates. The pound has suffered along with the dollar from a week of turmoil around China's financial markets and economic outlook which has trimmed some bets on the prospect of rises in British and US borrowing costs.
Central bank policymakers seem for the moment unfazed though, with Bank of England chief Mark Carney reiterating over the weekend that the bank will have some serious thinking to do on rates come the turn of the year, bolstering sterling in early trade. That, and the prospect of a dovish message from the European Central Bank this week to counter a stronger euro, left a number of major banks calling for a stronger pound on Tuesday.
"Our house view is that currencies will continue to be driven by policy divergence," Bank of America Merrill Lynch strategist, Kamal Sharma, said. "Now that has been derailed somewhat by the events in China but we have an ECB meeting this week that should give a more dovish outlook and that should focus the market's attention back on that underlying story."
Sterling interest rate forwards for the first quarter of next year, however, have come in around 10 points from highs hit in July when bets on a September hike by the US Federal Reserve - and the BoE following early next year - were growing. That retreat on rate expectations has helped pull the pound back from near 8-year highs around 69 pence per euro and dealers say the direction of travel for the next few weeks, or even months, looks uncertain.
"The suspicion in everybody's minds is that, whatever central bankers are saying right now, the last two weeks shows us that the world is still not ready for higher rates," said a senior dealer with one international bank in London. "This is not a market with clear direction, its one where volatility is going to rule for a while." By late afternoon in London, sterling was trading half a percent lower at 73.42 pence per euro, having fallen as far as 73.74 pence after the manufacturing survey. It was marginally lower against the dollar at $1.5335.