Worsening Trade Deficit Sends Pound to New Multi-Month Low

Market Trends - 11/01/2017

In spite of an abundance of positive news during the session in the form of expanding manufacturing and industrial production activities, the Pound continues to give ground versus the US dollar as concerns mount about trade and Brexit negotiations.

Although Prime Minister Theresa May has promised to deliver an address later in the month that will cover the main points of the proposed exit, the March triggering of Article 50 is rapidly approaching, raising significant skepticism.  In her first address since 2017, the hallmark of her speech was the desire for the United Kingdom to retake control of its borders, even if that meant sacrificing access to the European Union single market.

While this has been a troubling development for local companies that enjoy access to mainland European markets for selling goods and services, it is still unclear how the government’s negotiating position is evolving to tackle these looming challenges.

Besides Brexit, fundamental indicators such as the UK trade deficit show that the weaker Pound is gradually working its way through the entire economy.

Expanded imports combined with rising costs for imported goods sent the November deficit to the lowest since September, printing at -£4.167 billion during the month.  Even though exports experienced a modest pickup, helped by the increased competitiveness of a cheaper Pound, the gain was not enough to help shrink the deficit.

From the perspective of GBPUSD, the widening deficit has actually been viewed as a net negative by market participants despite gains in the manufacturing sector.  Going forward, the uncertainty of how the government will handle Brexit negotiations is still weighing heavily on sentiment.  With the March deadline fast on the approach, the Pound momentum lower may accelerate if the government fails to answer the pressing questions of how an exit will unfold and its implications for businesses.

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