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Investors ‘Washed Out’ as Sterling Hits 3-Year Low

Pound coin
Matt Cardy | Getty Images
Pound coin

Sterling fell to a three-year low against the dollar on Tuesday, as weak data raised investor concerns that an economic recovery in the U.K. was still some way off.

The currency slumped 0.77 percent to $1.4835 in afternoon trading, after U.K. manufacturing unexpectedly fell 0.8 percent in May from April, and by 2.9 percent on the year — significantly below analyst forecasts.

In addition, industrial production was flat, missing forecasts, and the U.K. trade deficit widened to £2.4 billion ($3.1 billion) in May, up from £2.1 billion in April, causing the pound to lose a full cent against the dollar. It also sent the euro to a four-month high of 1.153 against the pound.

Jane Foley, senior currency strategist at Rabobank, told CNBC the sterling's weakness had a lot to do with the Bank of England's (BoE) statement last week, which warned that bond yields had risen too far, too fast.

Geoffrey Yu, forex strategist at UBS, told CNBC there were "too many central bank stories to chase" at the moment, and markets were caught off-guard by the BoE's announcement.

"Clearly markets were over positioned for the BoE being less dovish or a bit more hawkish reflecting the positive U.K. data. Then they got washed out and lot of people have said: 'I've had enough,'" said Yu.

(Read More: Promising UK Data Greet Carney on First Day)

Forex analysts at Deutsche Bank led by George Saravelos said it wasn't time to turn bullish on sterling.

"We will get more clarity in the August inflation report rather than last week's (monetary policy committee) meeting, but guidance would be a 'cheaper' option of counteracting the recent pick-up in rates volatility while also allowing the BoE to draw a line between itself and the Fed," said Saravelos.

"We think it's too early to turn bullish GBP both from a flow and a monetary policy perspective. We remain bearish GBP/USD targeting the low 1.40s and see EUR/GBP holding the mid-80s," he added.

By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave

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