Exchange rates fall despite narrowing trade gap

13 March, 2015

Robin Haynes

The Pound fell across the board on Thursday, despite encouraging figures showing the UK trade gap narrowed to £616m in January. Much of the improvement was due to falling oil prices making fuel imports appear less – but the underlying figures also fell to its lowest since June 2013.

Sterling lost nearly 2c against the Euro, and a cent against the US Dollar, through the day. Perhaps it is not surprising that after 2 months of gains for GBP-EUR we saw a little correction in pricing; the Euro’s drop in value in 2015 has been extreme. The Euro was also propped up by German inflation figures, showing that inflation rose back above zero in February, helping to calm deflationary fears there. The US Dollar on the other hand continues to increase in value as expectations of an early interest rate rise in the States gather pace.

Mark Carney, the Governor of the Bank of England, also used a speech to business leaders in Sheffield yesterday to attempt to allay fears of a period of deflation in the UK, which could be disastrous for the UK economy and the Pound. Mr Carney said that higher wages would soon lead to rising prices, and that eventually the Bank of England would look to raise interest rates – but not until after a deflationary period which he expects in the coming months. Delayed interest rate rises make for a lower currency, another reason why we saw sterling drop back yesterday.

Mr Carney also said that the stronger Pound was causing inflation to remain too low, due to the falling cost of imported goods – could this be a signal that the Bank of England might intervene to halt sterling’s recent surge?

Canadian unemployment today

Those of you sending money to Canada have the only major data release of today to look forward to: Canadian unemployment at 12.30 UK time. The Canadian Dollar is currently near its cheapest in post-recession times and a drop in unemployment could improve rates further. We also have US producer inflation today to finish the week ahead of a busy week next week.