Record high trade deficit unsettles pound

The pound’s recovery was temporarily knocked off track yesterday after UK trade data disappointed, although strong industrial and construction output data helped Sterling get back onto its feet.

Today the pound is on the decline. GBP/EUR has fallen to €1.1157, while GBP/USD is down to US$1.3193. GBP/AUD is trending at A$1.6945, GBP/NZD at NZ$1.8659, and GBP/CAD at C$1.6505.

There is no UK economic data set for release today, but read on to find out about the Eurozone and US events yesterday and today that promise to keep GBP/EUR and GBP/USD in uncertain territory…

What’s been happening?

The pound was on rocky form yesterday, with the momentum from Monday’s rebound beginning to run out.

Market sentiment was not aided by a disappointing run of UK trade data, which revealed that the visible trade balance had widened to a record deficit of -£14.24 billion in August. This was thanks to a 4.2% surge in imports, with exports growing just 0.7% during the same period.

This further cooled belief that the manufacturing sector would experience booming demand from the weakness of Sterling exchange rates.

The pound was able to recover against some of its peers later in the day, however, after the National Institute of Economic and Social Research (NIESR) estimated that GDP had grown 0.4% in the three months to September, while revising its projection for the three months to August up to 0.5%.

The euro, meanwhile, was largely on positive form, buoyed by better-than-expected German trade data. Exports grew 3.1% in August – nearly threefold the forecast level – helping to push the trade balance up to €20 billion instead of the forecast €19.5 billion.

GBP/EUR losses eased back towards the end of the day’s trading, however, as markets became increasingly uneasy ahead of a session in the Catalan parliament that could have seen the region’s President, Carles Puigdemont, declare independence from Spain.

The US dollar was on poor form, thanks to a disappointing business confidence index from NFIB. The index for September clocked in at 103 after confidence scored 105.3 in August, against forecasts of a more modest tick down to 105.

What's coming up?

An empty UK data calendar today is likely to leave the pound vulnerable to political developments and the general gloomy economic outlook.

There is nothing on the Eurozone economic data calendar either, other than a speech from the European Central Bank’s (ECB) Chief Economist Peter Praet. Last night’s Catalonian parliament saw Puigdemont declare independence from Spain as a result of the recent referendum.

However, this may not weigh on the euro, as the region has suspended the move for several weeks in order to allow negotiations to take place with Spain’s central government. This could keep the GBP/EUR exchange rate under pressure today.

The pound could also see further losses against the US dollar this evening if the minutes of the September Federal Open Market Committee (FOMC) monetary policy meeting continue to suggest that an interest rate hike in December is likely.

We’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers.

Phil McHugh,
Trading Floor Manager

Phil provides dealing and hedging services whilst also helping to manage Currencies Direct overall market exposure.