Sterling fell against the dollar on Monday, hit by the effects of an erroneous trade on an electronic dealing platform, while overall sentiment towards the pound was fragile on expectations that more monetary easing may be needed to revive the economy.
A survey of the UK manufacturing sector came in above forecasts but this did little to offset the view that Britain's economy is struggling to cope with the domestic effects of fiscal austerity and the impact of the euro zone's debt crisis.
Sterling fell sharply around the release of the data, with traders pinning the blame on a computer-generated trade.
"It was a miss-hit on cable and we hear an algo just stuck an offer at $1.5480 in the machine which should have been $1.5580," said a London-based trader.
The pound quickly recovered some losses to trade at $1.5530, but was still down around 0.3 percent for the day, struggling with the combined effects of mounting problems in the European banking sector and an overall grim outlook for the UK economy.
Shares in Franco-Belgian bank Dexia - heavily exposed to loans to Greece -- fell sharply as French and Belgian finance ministers readied for a meeting to discuss ways to shore up its troubled balance sheet. News that Athens had missed deficit targets also hit risk sentiment.
"You'd want to be short of sterling against the dollar with the negative risk sentiment this morning, overlayed with a reasonable probability of more quantitative easing for the UK economy this week," said Jeremy Stretch, currency strategist at CIBC.
Traders said the September low of $1.5325 was the next key downside target for the pound, while options dealers said there had been good demand for downside sterling strikes in the $1.50/1.51 area.
Sterling has struggled in recent weeks as a faltering UK economy and worries over global growth put pressure on the Bank of England's Monetary Policy Committee to restart its asset purchase programme, with some traders speculating the bank will resume easing at this Thursday's MPC meeting.
British manufacturing activity unexpectedly returned to growth for the first time in three months in September, but a fall in export orders cast a shadow over the outlook.
"September's CIPS/Markit report on manufacturing suggests that output in the industrial sector might have increased a bit -- but it still seems likely that the sector remained in recession in Q3 as a whole," said Samuel Tombs at Capital Economics.
Sterling traded with slight losses versus the euro at 85.96 pence after the erroneous sterling/dollar trade had allowed the euro to rise to 86.31 .
But the pound remained in sight of a three-week high of 85.61 hit earlier on Monday. Technical analysts said the 200-week moving average at 85.05 was key support, while a break below the September trough of 85.31 would take euro/sterling to a seven-month low.
"Under a worst-case scenario or even in the event of a gradual, further deterioration in euro area financial conditions, EUR/GBP could break into the 0.78-0.83 range," said Stephen Gallo, Head of Market Analysis at Schneider FX.
"By the time that range comes into view - if it comes into view - we may have already witnessed another round of BoE asset purchases."
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