Sterling takes blows from trade deficit and Fitch credit warning

Data this morning has shown that the UK trade deficit widened by one billion pounds, more than had been expected in January.

A deficit of £8 billion was recorded for the first month of this year, a long way from the median forecasts, which in fact called for a modest narrowing of the deficit to £7.0 billion. It has come as a greater surprise, given the comparative weakness of the UK currency recently, which experts had anticipated would lead to an improved trade balance.

Duncan Higgins, senior analyst at Caxton FX stated, "These figures have come as quite a shock to the markets. With sterling as weak as it is, it had been hoped that the increased competitiveness of UK exports would have supported a rebalancing of the deficit. It isn't a marginal widening either, at £8 billion, this is the deepest trade imbalance that the UK has recorded since January 2009 and will simply snowball the negative sentiment already focused on the economy."

"The figures also serve to show that UK is still far too reliant on imports. The Bank of England may be extolling the benefits of a weak pound, but clearly the greater cost of importing goods is offsetting any positives," continued Higgins.

In reaction to the news, sterling has dropped sharply against the major currencies. The pound has slipped half a percent against the US dollar, dropping below $1.50 and thereby opening up further downside. Against the euro, the pound is also down, currently trading at 1.10, near to testing its three month lows.

Duncan Higgins added, "Compounding the problems for the UK, Fitch, the credit rating agency, this morning announced that Britain's sovereign credit profile has deteriorated. Along with France, and Spain, Fitch said that among the larger triple A nations, the UK fiscal situation is most at risk, which has consequently added to sterling's downward spiral."