By Claire West

Sterling has suffered a sharp dip this morning to €1.2030, after a survey showed a noticeable slow-down in UK manufacturing activity in August.

Data came in well below expectations with a decline to 54.3 in August from a downwardly revised 56.9 in July. Although at this level the manufacturing sector is still comfortably in expansionary territory, it marks a significant drop in output and is the lowest level since November of last year. It is becoming clear that activity is moderating in the second half of the year from the healthy level seen during the first six months. With spending cuts looming, a pickup in activity is looking increasingly unlikely in the medium term.

Duncan Higgins, senior analyst at Caxton FX comments, “The figure is some way from forecast and as a result has precipitated a sharp sell-off in sterling this morning. The manufacturing industry is still expanding but it is becoming evident that the pace of recovery is slowing. This will only add to the bearish stance of the Bank of England that is keeping monetary policy loose to offset the impact of the looming spending cuts.”

The market has reacted quite strongly to the data with sterling dropping half a percent against both the euro and the US dollar.

“Due to the government’s fiscal tightening, there has been a lot of focus on the potential negative impact on economic growth. Today’s data certainly hints that economic conditions may already be starting to lag, and if data from other indices begins to head south, sterling could come under increasing pressure,” continues Higgins.

Having fallen sharply, sterling is beginning to recover but remains half a percent down against the single currency around 1.2030. The pound is also off this morning’s highs against the dollar, currently trading just below $1.54.