The Pound weakened across the board yesterday as Britain’s rising trade deficit weighed on economic sentiment.
The UK deficit swelled from -£11.3 billion to -£12.7 billion as exports tumbled -0.7% and imports rose +3.3%. The disappointing data does little to suggest that the Pound’s 15% post-Brexit depreciation is having a positive impact on trade. In theory, a weaker currency can help improve competitiveness by making exports cheaper to foreign buyers. However, modern trade is complex and exporters often need to purchase raw materials from overseas before sending their finished products to the market. This to and fro can negate any positive impact of a depreciating domestic currency.
The Pound to Euro exchange rate ticked lower yesterday as disappointing British trade data impacted demand for Sterling.
A separate report showed that UK industrial production expanded 0.3% in June, beating forecasts of a -0.1% contraction. The figure was accompanied by positive growth of 0.6% in the manufacturing sector, however, the mildly upbeat factory output figures were not enough to lift the mood of doom and gloom around the Pound and the UK trade deficit.
Indeed, GBP/EUR remains close to its lowest level for seven years as Brexit anxieties and receding Bank of England rate hike bets continue to weigh on Sterling.
The Pound slid back through psychological support against the US Dollar yesterday.
In addition to the morning’s sour trade balance report, Sterling was hit by a lower-than-anticipated growth estimate for July. The National Institute of Economic and Social Research indicated that UK economic output was likely to have slowed from 0.3% 0.2% in the three months to July. The score was slightly less-than-expectations of 0.2% and was significantly lower than the long term average of 0.5%-0.6% quarterly growth.
Tensions between the US and North Korea remained a concern for traders, with Pyongyang issuing plans to fire four missiles close to the US Pacific island territory of Guam. Although markets are hoping for the best, the threat of military conflict has led to mild defensive inflows towards the safe haven US Dollar.
The Pound to Canadian Dollar exchange rate drifted downward yesterday as downbeat UK data and rising oil prices dragged GBP/CAD lower. OPEC sent oil prices to an 11-week high with a surprise upgrade to its expectations for global demand. The oil cartel raised its 2017 estimates by 100,000 barrels to suggest demand of 1.37 million barrels per day, which could potentially help ease the problem of global oversupply that has sent oil dramatically lower over the past three years.
Sterling traded within a tight range versus the Australian Dollar yesterday as a widening trade deficit reduced the appeal of the Pound and fear of military conflict between North Korea and the US dampened global risk appetite.
Although the New Zealand Dollar gained immediately after the Reserve Bank of New Zealand’s decision to leave interest rates on hold at 1.75%, due to upbeat comments on inflation and growth, demand for the ‘Kiwi’ shrunk later on in the day in response to dovish remarks. RBNZ assistant governor John McDermott said that the New Zealand Dollar ‘does need to adjust down’, which traders saw as a sign that the central bank was unlikely to start tightening policy anytime soon. GBP/NZD rallied by around 130 pips in response to the dovish comments.
13:30 USD Consumer Price Index (YoY) (JUL) High 1.8%
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