Sterling heads for biggest weekly fall vs euro in 5-1/2 years

By Jemima Kelly

LONDON, May 1 (Reuters) - Sterling skidded to a two-month trough against the euro on Friday after a leading gauge of UK manufacturing tumbled, leaving the pound on track for its biggest weekly loss against the shared currency in 5-1/2 years.

Financial data company Markit (NasdaqGS: MRKT - news) said its Purchasing Managers' Index (PMI) for manufacturing dropped to a seven-month low of 51.9 in April, below all the forecasts in a Reuters poll of 31 economists.

That added to worries about Britain's economic recovery just six days before national elections that look unlikely to hand any party an overall majority. It followed data earlier in the week showing a sharper-than-expected slowdown in the first quarter of the year.

Sterling slid over a percent against the euro to 73.965 pence, its weakest since Feb. 23. That left it down over 3 percent since Monday, its worst performance since September 2009, as the euro rallies on stronger euro zone data and rising bond yields.

The pound also fell to an intraday low of $1.5220, down 0.9 percent on the day.

"A lot of people who have been short sterling anyway, expecting sub-$1.50 and beyond, have been waiting for a pullback to re-instigate short positions in cable (sterling/dollar)," said Angus Campbell, senior analyst at online broker FxPro. "So the economic data is only going to compound that move lower."

Other data on Friday showed lending to British consumers rose in March by the most since before the financial crisis. Business borrowing showed its strongest rise in at least four years.

The cost of protection against volatility in the pound over the next week jumped. One-week sterling/dollar implied volatility, which expires on May 8, rose to 15.7 percent, its highest since the Scottish independence referendum last September, Reuters charts showed.

Polls show the ruling Conservatives and the main opposition Labour Party neck-and-neck before the May 7 elections. Support for Scotland's nationalist party has surged, making a hung parliament the most likely outcome.

"From a macro and longer term perspective, we see limited value in staking a sterling position before the election," wrote Citi strategist Josh O'Byrne in a research note. He expressed scepticism as to whether victory for either of the main parties would have a lasting effect on sterling's exchange rate.

UK government bond futures rose after the UK data. June gilt futures stood at 118.65, up 53 ticks on the day, from 118.57 just before the data. Ten-year gilt yields dipped 1 basis point to 1.79 percent, down 4.2 bps on the day. (Editing by Ruth Pitchford)