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London - The pound strengthened for a second day against the euro as a report showed U.K. manufacturing grew faster last month than economists forecast.
Sterling advanced for the first time in 10 days versus the dollar, after matching the lowest level in almost five months. The pound was supported after the Markit Economics Purchasing Managers’ Index for manufacturing beat a forecast even as it fell from August’s reading.
The British currency has been weighed down in recent weeks as volatile equity markets and concern among investors that the slowdown in China could drag down global growth have fueled doubts on the ability of central banks in the UK and the US to tighten monetary policy.
The Federal Reserve kept its benchmark rate on hold at a record low in September and futures markets haven’t priced in a Bank of England rate increase until the end of next year.
Investor pessimism on BOE monetary policy might be overdone, according to Sam Lynton-Brown, a London-based foreign- exchange strategist at BNP Paribas SA.
“The market has delayed its expectation for the BOE to start tightening policy very significantly, out until November 2016,” he said. “This is in contrast to our economists’ expectation that the BOE will go in February next year.
So in our view, there is a lot of scope for sterling upside, in particular against the euro as BOE rate expectations reprice.”
BOE outlook
The pound gained 0.1% to 73.78 pence per euro as of 15:43. Sterling rose 0.2% to $1.5158 after falling to $1.5108, the lowest since May 5.
Forward contracts based on the sterling overnight index average, or Sonia, suggest that a full quarter-point increase to the UK’s 0.5% official rate won’t come until after November 2016.
BNP Paribas’ Lynton-Brown said the bank recommended a short position in euro-sterling at 73.95 pence per euro last week, with a target of 70 pence, which it predicts will be hit before the end of the year.
A short position is a bet an asset’s price will depreciate.
UK Data
The Citi Economic Surprise Indices for Britain, which measures data surprises relative to market expectations, has shown an improvement in recent weeks and this could lend support to the case of the BOE raising rates sooner than markets have been pricing in.
Markit Economics’ gauge for manufacturing fell to 51.5 from a revised 51.6 in August. The median forecast of analysts in a Bloomberg survey was 51.3. A reading above 50 reflects expansion.
“The stronger-than-expected PMI should help unwind some of the pessimism in the market” about sterling, said Ipek Ozkardeskaya, a markets analyst at London Capital Group. She added this increases the “incentive to buy on dips to build mid- term long positions in sterling.”
