Pound Drops as UK Manufacturing Data Falls to its Lowest

The British pound fell on Monday as the currency absorbed disappointing UK manufacturing data caused by worries over Brexit and the US-China trade war.

The sterling dropped 0.6 percent to 1.2886 against the US dollar, retreating from its intraday high of 1.2877.

The currency also edged lower against the euro, with the euro/pound pair climbing 0.7 percent to 0.9023.

Among key currencies in early London trading on Monday, the sterling was the weakest. It is on track to slide for the third day in a market that is being cautious of risk.

UK Manufacturing at its Lowest Level in Two Years
The pound extended losses after data from a London-based research firm showed activity in UK factories declined to its lowest level in two years in August.

UK manufacturing purchasing manager’s index (PMI) was down 52.8 percent in August, compared with 53.8 in July. This was the weakest reading in 25 months. Analysts had expected growth in the sector to remain unchanged.

The report suggested the weakness was the result of the first contraction in new export orders since April 2016. Survey respondents pointed to the slower pace of expansion in the world economy as the cause of the contraction in August.

The UK data follow similar reports released on Monday that showed a slowdown in the manufacturing sector across major Asian and European economies.

Performance in eurozone factories nearly reached a two-year low, while China’s export orders dropped for the fifth consecutive month. Export orders in Japan and Korea also shrank.

Since the Brexit vote in June 2016, higher global demand and relative weakness in the pound has helped Britain’s manufacturing division even as weakening real incomes kept a tight grip on UK buyers’ spending power.

No Brexit Deal Possibility

The sterling had already been weighed down by the statement of European Union’s (EU) chief negotiator Michel Barnier strongly opposing British Prime Minister Theresa May’s plans for a future trade accord. Barnier’s remarks further raised concerns over the possibility of a no Brexit deal.

May said she will not be pushed into compromises on her Chequers agreement that are not in the national interest and warned that she will not give in to those demanding for a second referendum on the withdrawal deal as she believed it would be a gross betrayal of their democracy and trust.

The Chequers treaty would recognize the UK agreeing a common rulebook with the EU for trading in goods, in an effort to keep a conflict-free trade at the border.

However, critics see the UK being tied to EU policies as a result of May’s proposed agreement, preventing Britain from performing its own trade transactions in years to come.

With Brexit talks between the UK and the EU in full swing, the potential cliff of a hard-Brexit has come more clearly into focus, according to strategists who estimated the overall cost of Brexit as 2 percent of gross domestic product (GDP).

The People’s Vote, a cross-party group including some MPs, has requested to have a public voting on the final Brexit deal.

Negotiations between the UK and the EU have an unofficial October deadline, but Barnier said this could be stretched to mid-November.

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