UK sterling takes a pounding

London - Sterling slipped to a fresh two-and-a-half year low against the dollar on Tuesday after dismal British manufacturing data revived fears of another recession and increased bets of more easing by the Bank of England.

UK industrial output unexpectedly fell in January, and at its fastest pace since June last year, signalling a poor start to the year for the British economy.

Sterling fell to $1.4832, its lowest since June 2010 after the data. It was last trading at $1.4855, down 0.4% against the dollar on the day. Options expiries at $1.4900 could keep sterling pinned around those levels.

Traders said buyers would emerge on such dips, which could slow the pound's decline a bit but not stop it. Some traders cited $1.47 as the next target.

The euro rose to a more than two-week high against the pound at 87.77 pence, not far from the more than 16-month high of 88.15 pence hit on February 25. The euro was last up 0.1% on the day at 87.55 pence.

Losses against the euro and the dollar pushed the sterling's trade-weighted index to a 20-month low of 77.9, Bank of England (BoE) data showed.

"If economic data continues to remain weak, like we saw today ... it could make it easier for the BoE to loosen policy," said Raghav Subbarao, chief FX options strategist at Barclays Capital.

"Although our base case is for no more quantitative easing from the BoE just yet, it is a very finely balanced call."

Rising speculation the BoE would be compelled to print more money to support the faltering economy stood in contrast to the United States, where a string of better data has supported the view the Federal Reserve may scale back its asset purchase programme later this year.

The spreads between two-year US government bonds yields and their British counterparts are moving in favour of US debt, underpinning dollar demand.

Analysts also said investors would prefer expressing a bearish view on the British economy by selling sterling against the dollar rather than the euro given that the US economic outlook has been more upbeat than that of the eurozone.

UK downgrade risk

The pound has been one of the worst-performing major currencies in 2013, falling 8.3% against the dollar and around 7% against the euro.

Strategists also said minutes from the central bank's Monetary Policy Committee on the likelihood of further asset purchases, the UK budget on March 20 and data releases were likely to see sterling suffer further losses.

Markets will remain wary of sterling ahead of the UK budget next week. Speculation is mounting that Chancellor George Osborne may announce a review of the Bank of England's remit and give it more leeway on inflation targeting.

Barclay's Subbarao said the budget and a likely change in the BoE's remit, perhaps a fixing of a time frame by which the central bank needs to bring inflation back to its target, would be the next focus for sterling.

Strategists saw a risk that ratings agency Fitch could follow Moody's and downgrade the UK's credit rating after the budget, which would also weigh on sterling.

"There are concerns on just about every front for the UK, political concerns, whether there will be another downgrade, the budget and whether or not we will see more monetary stimulus, everywhere you look there is a negative for sterling," said Neil Mellor, currency strategist at Bank of New York Mellon.

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