British Pound Falls Sharply Against U.S. Dollar and Yen on Weak Economic Performance

The British pound fell sharply against the U.S. dollar and the Japanese yen on Friday, following a series of disappointing data from the British economy. At around 6:40 pm GMT, the pound lost 0.82% of its value against the greenback to trade around $1.6229. At the same time, the pound's fall was even steeper against the Japanese yen after shedding 0.9% of its value to stand around ¥130.3150.

The British pound was hit by a series of disappointing results. According to the Office for National Statistics data, manufacturing output fell by 1.5% in April on a month earlier, which represents the steepest manufacturing output decline in almost two and a half years. At the same time, industrial output, a wider measure of production that includes energy supply and mining, fell by 1.7% in April. On an annual basis, industrial output was 1.2% higher, however. Many analysts were quick to downplay the results, according to BBC, as the April production was disrupted by the Royal wedding.

Another series of data showed the British inflation easing in May. Britain's PPI input, which reflects the changes in the prices on primary products and components, fell by 2% in May on a month earlier, when most analysts predicted it to decline by 1.1%. In April, the PPI input rose 2.6%.

Britain's PPI output, which measures factory gate price changes, rose 0.2% in May, compared to a month earlier, and 5.3% compared to May 2010. Most analysts had predicted the PPI output to rise 0.3%, however.

Decelerating inflation is good news for the British economy, but it will leave some traders worried about when the next rise in interest rates will occur. Easing inflationary pressures will give the Bank of England more time to help the fragile recovery of the British economy by maintaining very low interest rates.

On Thursday, the Bank of England decided to leave its interest rates at record low of 0.5% for the 27th straight month. Regardless of how distorted the April manufacturing output data is, these data will surely give additional ammunition to the opponents of interest rate rise.

Interestingly enough, the British pound made some gains against the euro today, rising 0.33% to €1.1360, in spite of signals from the European Central Bank that it is prepared to start increasing its interest rates as soon as July. Traders seemed to be avoiding the euro after a string of disappointing news showed the recovery in Germany and France might be cooling.

Traders who believe the recent downfall in the April manufacturing output is another sign of how fragile the British economic recovery is, which should keep the level of the pound subdued for some time, will be interested in shorting the pound. Decelerating inflation will just be seen as another sign pointing in the same direction. As a result, these traders will be interested in the ETFS Short British Pound Long US Dollar ETC ETF (SGBP).

Other traders will be encouraged by hopes of a postponement in interest rate increases. These traders might think that lower interest rates will put the British economic recovery on a firm foothold. Instead of looking for the strength of the pound in higher interest rates, these traders might be looking for it in stronger economic recovery. These traders will be more interested in the CurrencyShares British Pound Sterling Trust ETF (NYSE: FXB) and the GBP/USD Exchange Rate ETN (NYSE: GBB).