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Pound Lower As U.K. Economy Contracts; BoE Vlieghe Hints At Rate Cut

The pound slipped against its major counterparts in the early European session on Monday, after the UK economy contracted unexpectedly in November, opening door for a rate cut by the Bank of England in the coming months.

Data from the Office for National Statistics showed that the UK economy shrank in November due to the weakness in services and industrial output.

Gross domestic product contracted 0.3 percent on month driven by the falls in services and production. GDP had advanced 0.1 percent in both September and October. Economists had forecast GDP to remain flat.

In three months to November, the economy grew 0.1 percent sequentially after rising by revised 0.2 percent in three months to October.

Industrial production declined 1.2 percent month-on-month in November after easing 0.4 percent in October. Manufacturing logged a monthly fall of 1.7 percent due large falls in output of transport equipment, food and chemicals.

Industrial output was forecast to remain flat and manufacturing to fall 0.1 percent in November.

On a yearly basis, industrial production was down 1.6 percent, faster than the 0.6 percent decrease a month ago. Likewise, the decline in manufacturing output deepened to 2 percent from 0.3 percent.

Over the weekend, Bank of England policymaker Gertjan Vlieghe joined other officials to back additional policy loosening, if there are no indications of a rebound in economic activity after the election.

Speaking to the Financial Times, Vlieghe said that he would vote for a reduction in interest rates later this month, if the economic growth remained sluggish.

"I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer," he added.

The pound depreciated to 1.2608 against the franc, a level unseen since October 15, 2019. The next possible support for the pound is seen around the 1.24 level.

Breaking the key 1.30 level, the pound slipped to near a 3-week low of 1.2961 against the greenback. If the pound slides further, 1.27 is likely seen as its next support level.

The pound fell to a 5-day low of 142.36 against the yen, from Friday's closing quote of 142.98. The pound is seen locating support around the 140.00 level.

The U.K. currency declined to nearly a 3-week low of 0.8576 against the euro from last week's closing value of 0.8511. On the downside, 0.87 is possibly seen as the next support level for the pound.

Data from Destatis showed that Germany's wholesale prices continued to decline in December.

Wholesale prices decreased 1.3 percent year-on-year in December but slower than the 2.5 percent decline seen in November. This was the sixth consecutive fall in wholesale prices.

Looking ahead, the U.S. monthly budget statement for December will be released in the New York session.

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