Sterling slips as economy stagnates; eyes on BoE

By Samuel Indyk

LONDON (Reuters) -The British pound dropped against the dollar on Friday after data showed the economy had stagnated in July, although it was still set for its second weekly rise before a Bank of England policy meeting next week.

UK gross domestic product remained unchanged in July after growing 0.4% in June, the Office for National Statistics said, as manufacturing output, which makes up 9% of the economy, dropped by 1.3% on the month.

"These GDP numbers are very volatile but the trend is a little bit softer over the last few months than it was earlier in the year," said Dominic Bunning, head of G10 FX strategy at Nomura.

"It's a relatively volatile series that isn't going to make the BoE concerned."

The pound was down 0.2% against the dollar at $1.3553, but was still set for a 0.3% weekly rise.

The BoE is widely expected to keep its benchmark Bank Rate unchanged on September 18, after a split decision to lower the rate to 4% in August.

Investors instead were focusing on the central bank's plans to reduce its bond holdings, known as quantitative tightening, which are announced at the September meeting every year.

The BoE has reduced its bond holdings by 100 billion pounds ($135.32 billion) over the past year and Governor Andrew Bailey said earlier this month that the future pace of QT was an "open decision".

A BoE survey of investors last month showed a median expectation that the central bank will slow the pace over the next 12 months to 72 billion pounds.

A reduction to 75 billion is "unlikely to rock the boat," ING analysts said in a research note.

If the BoE were to keep the pace of bond sales unchanged, gilts could come under pressure, pushing yields higher, said Nomura's Bunning.

"Generally speaking, big moves higher in gilt yields, particularly long-end ones, are associated more with sterling weakness than with sterling strength," Bunning said.

"There is a bit of tail risk here for sterling."

Against the euro, the pound fell 0.1% to 86.51 pence but remained within its recent range.

($1 = 0.7390 pounds)

(Reporting by Samuel Indyk; Editing by Aidan Lewis)