Sterling suffers further setback after trade deficit widens

Bolsom expects Bank of England to be “cautiously optimistic” in inflation report

Sterling suffered further losses this morning after data showed the UK trade deficit widened more than expected to £7.278 billion, after imports from non-EU countries rose at their fastest rate since March 2008. Against the euro it initially fell to €1.1243, and dipped to $1.5582 against the dollar, from just under $1.56 before the data.

Mark Bolsom, Head of the UK Trading Desk at Travelex, the world’s largest non-bank FX Payments Specialist, said “This is seriously disappointing news. We had hoped that November’s figure was sustainable and that Mervyn King’s export-driven, investment-led exit strategy was working.

“This reinforces my suspicion that a double dip recession is a distinct possibility. We crawled out of recession in the last months of 2009 and lower export volumes are not going to help push our GDP into a more robust and sustainable position.”

Bolsom continues, “The UK is experiencing real economic uncertainty at the moment – a ballooning budget deficit, promises of higher taxes and swingeing spending cuts, as well as creeping inflation. Political indecision is exacerbating this as the markets get anxious about the possibility of a hung parliament.

“The data will compound the affect this morning’s poor BRC retail sales figures had on the pound, and I expect it to be confined to tight ranges all day. Tomorrow’s inflation report from the Bank of England will not provide investors any comfort either.”

Bolsom expects the Bank to be “cautiously optimistic” in their inflation report: “Undoubtedly they will say that the inflation overshoot is temporary and that the economy is showing signs of returning to growth. They may even say that the economy is performing better than the 0.1% Q4 GDP number.

“The Bank is in a very difficult place as their forecasts require a more transparent fiscal strategy than the government is giving. However, as the government continues to avoid any announcements on spending cuts or tax rises, King might publicly call for a clearer indication – although this would be very surprising, as the Bank should remain neutral.

“One thing we can be sure of is that the Bank will not tighten monetary policy – i.e. raise interest rates - as fiscal policy will start to tighten soon.”