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Sterling retreats from 28-month high

Thursday, January 02 12:50:38

Sterling retreated against the dollar following weaker-than-expected UK manufacturing data today, after touching a fresh 28-month high in early trade.

The pound hit session lows of $1.6542 after the release of the Markit/CIPS Manufacturing Purchasing Managers' Index (PMI), which fell to 57.3 in December from a three-year high of 58.1 in November.

The survey slightly tempered optimism about Britain's economic outlook, which had pushed sterling to as high as $1.6605 earlier, and by 1100 GMT the pound was down 0.1 percent on the day at $1.6553.

March gilt futures pared losses slightly to stand at a session high of 106.26 at 0934 GMT, but were still 30 ticks down from their Dec. 31 close.

The PMI reading was below the 58.0 expected by analysts. However, it was still well above the 50 mark that signals growing in manufacturing activity, indicating the UK's economic recovery was still on track.

"Really this is still a good number. The expansion that we see in a number of this size, it's very comfortable given where we have come from in terms of the UK economic recovery," said Jane Foley, a senior currency strategist at Rabobank.

"In a way, the fact that the market has overestimated the number today is symptomatic of the optimism that has been built into the UK economic recovery. And I think that the markets need to keep that in check."

Against the euro, sterling was up 0.15 percent at 82.92 pence, reflecting broad weakness in the single currency as it retraced some recent gains as banks began to repatriate funds ahead of the European Central Bank's asset quality review.

Sterling gained nearly 2 percent against the dollar in 2013, with most of those gains made in the second half as Britain's economic recovery proved stronger than expected.

Two quarters of mostly positive economic data, as well as fears of an overheating housing market, have fed expectations that the Bank of England may be the first major central bank to raise interest rates.

That prospect has provided further support to the pound, though policymakers say the recovery remains too fragile for a rate hike anytime soon.

While Britain's economy has outperformed the euro zone, it is still smaller than it was before 2008, unlike Germany or the United States which have grown beyond pre-crisis levels.

The Bank of England has been wary of an overly strong pound, noting that it could weigh on the UK economy by reducing demand for British goods at home and abroad, hurting manufacturers who are just starting to recover.

So far though, traders seem unperturbed by policymakers' attempts to talk down the pound. (Reuters)