LONDON (AFP) - Sterling was weak despite a stronger-than-expected survey of manufacturing activity this morning, as weekend reports of a possible snap general election in February prompted some selling.
The outlook for the British manufacturing sector may not be as gloomy as official data has suggested, after the CIPS manufacturing purchasing manager index showed an unexpected slight rise in October, analysts said.
In particular, a rise in new orders suggests a more positive outlook for the future, they said.
The CIPS/Reuters Purchasing Managers Index showed activity edged up to 53.0 in October from 52.3 in September to post its first rise since July, driven by improvements in new business and employment. The reading was above analysts' forecasts for a more modest rise to around 52.5.
New orders meanwhile expanded at an increased pace for the first time in three months, with the latest seasonally adjusted new orders index rising to 53.4 against 52.1 in September.
Monday's more positive survey is highly unlikely to give the Bank of England the necessary impetus to hike interest rates when it meets this week, Investec's Page noted that it makes the possibility of a rate hike early next year more likely.
"Overall, this survey will encourage the Monetary Policy Committee that the large fall in manufacturing output in third quarter, which dragged overall GDP growth down to just 0.4 pct, may prove only temporary," said Paul Dales, UK economist at Capital Economics.
Meanwhile, the dollar was firmer in volatile, pre-election trade, as oil prices slumped amid news of higher Iraqi oil exports and reports of a possible solution to the dispute in Nigeria.
Oil prices fell around 2 US dollars, with US oil futures falling below 50 US dollars for the first time since early October.
Trade remained thin and volatile, however, with nerves ahead of tomorrow's US election leaving many investors sitting on the sidelines for the time being.
Earlier, the dollar had fallen after the US ISM index of manufacturing fell to its lowest level for a year.
"The market thought the risks were on the upside and a few investors got caught out," said Steve Barrow, currency strategist at Bear Stearns.
The impact was not significant, however, with most market players too cautious to make any move ahead of tomorrow's US election, he said.
Opinion polls are putting the incumbent president George Bush and senator John Kerry neck and neck ahead of tomorrow's vote.
The market's worst fear is that the result will be inconclusive and may lead to a similar situation to the last presidential election in 2000 when the final result went unconfirmed for weeks amid a series of legal battles.
Sterling London 1648 GMT 1325 GMT
US dollar 1.8317 down from 1.8326
Euro 1.4382 down from 1.4374
Yen 194.96 up from 194.94
Swiss franc 2.2044 up from 2.2012
11/01/2004 - 17:05 GMT - AFP