Sterling dips after UK services survey disappoints

(Updates prices, adds more comment)

By Patrick Graham

LONDON, Oct (HKSE: 3366-OL.HK - news) 5 (Reuters) - Sterling sank against the dollar on Monday after a monthly survey of the services sector crushed any remaining market expectations that the Bank of England is likely to raise interest rates any time soon.

The 53.3 point reading on the index of purchasing managers in a sector that dominates British economic output was the lowest since May 2013, and sharply below analysts' forecasts and the previous month's figures.

The pound dropped almost half a cent in response, to $1.5161 , down 0.2 percent on day and handing back some of the gains it had made along with a raft of other currencies against the dollar since U.S (Other OTC: UBGXF - news) . jobs data on Friday.

"This has taken the pound properly lower," said Tobias Davis, a currency hedging manager at Western Union in London.

"It (Other OTC: ITGL - news) is further evidence that all the rate hike talk is still premature. Couple this morning's data with a deteriorating external environment, we're not going to see a sniff till next year."

Against the euro, sterling did slightly better, inching up 0.1 percent on the day to 73.83 pence per euro.

The U.S. non-farm payrolls on Friday shocked markets out of any expectations of a rise in Federal Reserve interest rates this year, and the PMI numbers added to a general sense that the world economy was slipping backwards.

If that is true, and the outlook for rates is flat for the foreseeable future, then the pound and the dollar should be first to suffer. Both currencies have gained over the past year from expectations both official and market rates would rise while those in Japan and Europe are held at rock bottom.

Overnight interbank swaps rates - effectively market pricing for rates over the next year - dipped in response although they remained above Friday's lows.

The other side of that coin, however, is that it should add up to a continuation of the ultra easy monetary policy that has inflated stock markets. European stocks were up 3 percent on the day, pushing debt markets lower and British government bond futures fell back 86 ticks to 118.87.

"We think downside for the pound will be limited given that interest rate markets have already delayed their expectations for the start of BoE (Shenzhen: 200725.SZ - news) tightening to February 2017," BNP Paribas (Xetra: 887771 - news) said in an afternoon note sent to clients. (Reporting by Patrick Graham; Editing by Alison Williams)