Sterling falls (again) as trade deficit grows

Data yesterday showed the trade deficit for the UK was much worse than expected, and this combined with renewed fears our credit rating may be downgraded has hit the pound, and exchange rates have fallen yet again. At 08:30am rates are as follows:

  • GBP/EUR 1.0991
  • GBP/USD 1.4908
  • GBP/AUD 1.6296
  • GBP/NZD 2.1150
  • GBP/CAD 1.5330
  • GBP/CHF 1.6067
  • GBP/JPY 134.40
  • GBP/ZAR 11.031
  • EUR/USD 1.3566

Trade Deficit
Data yesterday showed the UK trade deficit rose in January to its widest since August 2008, and the figures were far larger than expected, hurting Sterling. The news came as a disappointment and caused the pound to weaken, dipping 0.4% to 1.10 euros and losing 0.75% against the dollar to below $1.50.

The UK’s currency has fallen by some 24% against a basket of world currencies since early 2007 – before the global economic crisis. That fall in the value of the pound, making UK goods cheaper abroad, might have been expected to boost sales overseas. However, exporters may have taken advantage of a weaker sterling to increase their profit margins rather than increase sales.

Some are blaming the bad weather for the figures, but it could be the case that the pound is weakening because our economy is rubbish. Our debt is high, our trade deficit is high, unemployment is high, confidence is low, and in the background the government are simply spending more and more money that they don’t have in the hope this will fix things. I’m not so sure.

Brown says it’s all ok though
Gordon Brown is set to say he has guided the economy through a “storm” over the past 18 months and is best placed to secure its recovery. In a speech in London, he will argue the economy is at a “crossroads” and Labour must show the same “resolve” now as during the 2008 banking crisis. We certainly are at a crossroads, but I think until the budegt at the end of this month, we won’t know what their plans are to sort the economy out. The government is expected to announce the date of the Budget on Wednesday.

The Treasury is expected to confirm, in a written statement to Parliament, that Chancellor Alistair Darling will deliver his much-awaited pre-election Budget on Wednesday 24 March.

The Conservatives have pressed the chancellor to use the occasion to give more detail about how he intends to meet Labour’s commitment to cut the deficit in half over the next Parliament. They say the financial markets need greater reassurance on the matter, likening the deficit to a “dark cloud” hanging over the economy and its future recovery prospects.

On Sunday, Mr Darling said he was “absolutely committed” to this goal and said his tax and spending statement would show he was “on course” to cut borrowing from its forecast peak of £178bn this year.

He has ruled out a full spending review until there is more certainty about the economy and while promising to protect spending on health and schools has warned of “difficult choices” elsewhere. So, I read into these comments that they will say nothing of value, and really just use the budget as an electioneering tool. However, a lack of a clear plan will weaken the pound even more.

Economists have warned that substantial spending cuts and further tax rises will be needed in the medium term to tackle the deficit but opinion is divided on when this process should begin. I think it should start sooner rather than later, as most leading economists do.

Todays Data
We have industrial and manufacturing production data, and also a GDP estimate. An important day for the pound, and further bad figures may well send rates tumbling. Keep an eye on the days developments on our twitter page.

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