UK Trade Gap Narrows Further

The UK's trade deficit narrowed for the second consecutive month in January, printing at -4.1 billion pounds versus the expected -4.6 billion. The gap reached as wide as -4.7 billion pounds in the third quarter of last year. Since then, the sterling has lost 12% of its value against the Euro and 4% against the US dollar. This has served as a catalyst of the British export sector - volumes of goods sent to EU countries rose 5% while those sent to non-EU countries rose 7.1% in January.

From a long term perspective, the trade deficit is bearish for the pound, creating a net outflow of money out of the UK and cheapening the sterling by making it more abundant in the global marketplace. This serves to boost exports by raising the purchasing power of foreigners all the while cutting imports by reducing the purchasing power of domestic consumers. The BOE hopes for just such a re-balancing - a slowdown would allow the central bank to avoid raising interest rates further and potentially crushing the economy to meet their inflation target in the face of rising input costs worldwide.

DailyFX

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