Pound Weakness Continues As Trade Deficit Unexpectedly Widened

Daily Forex Fundamentals | Written by DailyFX | Jan 13 09 11:08 GMT |

Talking Points Japanese Yen: Finds Support at 88.80 Pound: Weakens As Trade Deficit Unexpectedly Widens Euro: Falls Despite German Fiscal Stimulus Package US Dollar: Trade Balance On Tap Pound Weakness Continues As Trade Deficit Unexpectedly Widened The Pound would reach a low of 1.4611 after the U.K. trade balance report showed an increasing deficit despite the Sterling's weakness. The U.K. visible trade balance widened to a record low of -£8.3 billion from -£7.6 billion as exports to China and the U.S. declined. Meanwhile, U.K. house prices fell another 8.6% according to the DCLG index, while the RICS housing report showed home sales falling to a record low. It appears that BoE Governor King's contention that the pound's weakness will act as a stimulus for the economy isn't holding weight as the sharp drop in global demand has led to the biggest trade deficit on record. The Sterling appears top be looking to test the January low of 1.4391 as it may find itself restricted in the 1.4000 - 1.5500 range over the medium term. Therefore, further weakness may give a solid entry point to take advantage of the current trading range if the levels hold. The Euro started overnight trading on the defense despite bullish comments from ECB President Trichet and the announcement that the German government agreed on the details of a 2nd stimulus package worth EUR 50 bln. The program will focus on increased infrastructure investment to increase economic activity and tax cuts. Meanwhile, President Trichet at a meeting in Switzerland said that he saw a significant global recovery in 2010 which could be a sign that the central bank may limit their future easing. Expectations are that the MPC will cut rate by 50bps t its policy meeting on Thursday. However, the S&P's announcement that it may cut Spain's debt rating and was looking closely at other European nations sent the single currency to the lowest level in a month at 1.3227 before it found support which sent it back above 1.3300 erasing earlier losses. The dollar continues to benefit from a flight to safety as markets continue to lower expectations for a rebound in global growth. The dismal labor reports last week has dimmed any hopes of a recovery on 2009 and lowered expectations for corporate profits. Equity markets continued to slide in Asia and Europe and the same is expected for the U.S. which will continue to provide support for the greenback. The U.S. trade deficit expected to have decline in November mainly duet o slumping oil prices which cut into the value of imports. Additionally, Americans demand for foreign goods has dropped as consumers continue to retrench. However, if part of the gain in trade was due to rising exports then it may increase expectations for global demand and offset the bearish sentiment prevailing on the equity markets. Fed chairman Ben Brernanke is scheduled to speak for the first time since the central bank lowered interest rates to the current 0%-25% range. The MPC's leader's comments could drive sentiment in the markets today especially if he paints a dour outlook for the U.S. economy. However, if the chairman believes that the measures that have been taken and the proposed fiscal stimulus plan are enough to lead to the economy to a return to growth, then we could see bullish momentum in the equity markets and possible dollar weakness. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.