UK economy: can Trump fuel a GBP recovery?

There has been no respite for the pound today, even though UK manufacturing production posted its largest increase for two years. GBP/USD dipped below 1.21 earlier, marking a fresh low for 2017, as weak trade data proved to be more important for the sterling market on Wednesday.

Trade before manufacturing

The UK’s trade balance for November was pretty dreadful at –GBP 4.1bn, vs. –GBP 3.5bn expected, and reversing a minor improvement for October. The market is getting picky about what UK economic data it is paying attention to, manufacturing data appears to be second tier these days, possible because, as the ONS said, non-services sectors of the UK economy have been ‘erratic and far more subdued’ in recent months. Thus, it is no wonder that the deterioration in the trade balance weighed on the pound this morning.

Current account fears also weigh on GBP

The widening of the trade balance was due to a surge in imports of transport equipment such as ships and aircraft, which have to be a one-off, so we would expect the trade balance to show some improvement for December. But this still does nothing to increase confidence about the UK’s dire current account position. The deficit was -5.05% of GDP in the third quarter, and this is likely to deteriorate further in Q4 2016 on the back of today’s trade data.

Carney’s comments on economic strength ones to watch

Overall, the mixed bag of UK economic data is, on balance, unlikely to stem the decline in the pound, which remains a hostage to its Brexit premium. The key risks for the UK today are Mark Carney’s testimony to politicians at 1415 GMT. We don’t expect Carney to rock the boat, however, it will be interesting to look out for his comments on the Bank of England’s forecasting record, and the surprising strength of the UK economy since last June’s Brexit vote.

Can Trump fuel a GBP recovery? 

In our view, Donald Trump’s first press conference since his election victory two months’ ago will be more important for the pound than Mark Carney or today’s economic data. If Trump fails to excite the markets and unleash another leg of the recent stock market and dollar rally, then it could be the pound’s best chance of a recovery. Of course, if he does excite animal spirits later this afternoon, and send the Dow Jones above 20,000 then GBP could be toast, and life below 1.20 for GBP/USD could become reality very quickly.