Trade between UK and the Eurozone slows significantly

09.00 AM

GBP

Mervyn King’s mid-week speech lifted the pound despite his projections for growth being revised down from 3 months earlier, from 0.7% to a flat 0.0%. Analysts were expecting his projections to show a negative outlook so markets deemed his remarks almost as a positive.

Yesterday the pound lost ground to the USD but marginally gained against the euro. Losses against the USD came from a mixture of poor UK trade deficit figures and some positive data releases for the US (which I will highlight later in this report). Gains for the pound against the euro were seen as the issues in Europe seemed to outweigh problems within the UK.

UK Trade Deficit figures showed a 15 year high in the month of June as exports to neighbouring eurozone countries significantly slowed. Trade deficit figures look at the total imported and exported in a given time period, if exports are up compared with how much was imported it is seen as a positive for the country/currency in question. For the UK however it was not good news, analysts had expected a decline of 0.2 from -8.4b to -8.6b but the actual figure was a staggering -10.1b the largest trade deficit since 1997. A real knock to the UK highlighting it fragile economy.

9:30am UK time we are expecting to see some positive Month on Month and Year on Year figures for Consumer Inflation – Producer Price Index Input and PPI Output

EUR

Throughout the course of the week the euro has lost ground against Sterling compared to the strength seen the week before as a result of Mario Draghi’s (Head of the European Central bank) comments. It was not just the pound that benefited against the euro, it has lost out to an array of currencies, as a week of poor data has been released and its finally being accepted that it’s not only if a country leaves the eurozone but when.

This week we have seen Italy continuing deeper into recession along with the French Central Bank predicting that France will join soon. In the first quarter of this year France showed 0% growth but is now being predicted by the FCB in the second to have contracted by 0.1% and the same contraction in the 3rd quarter which would put them into recession. Officially a country falls into recession when it has shown a contraction of growth of two consecutive quarters.

Germany, one of the strongest economies in the eurozone had a shock in the month of June as exports significantly declined. To neighbouring eurozone countries year on year they were down 3%. It is no secret that Germany's economy has very strong foundations built around its export market so for them to have fallen as much as they have is a real worry. 

One of the very founders of the single currency and ex-chief economist at the European Central Bank, Otmar Issing, made comments this week that he believed ‘everything indicates the euro will survive but how many countries will remain a part of it is another question’. Poignant comments from somebody who once had such a power on the single currency. Yesterday we also saw Greece’s unemployment figure had risen again month on month from 22.6% up to 23.1%

There are no data releases seemed as significant for the eurozone today. 

USD

The FED (American Federal Reserve), as of late, have decided to play their cards close to their chest with regards to any upcoming monetary stimulus packages and it appears that risk is back on (large investors are willing to look away from the USD to other currencies to put their investments). When markets are particularly volatile large investors tend to turn to the USD and away from any risk due its perception as a safe haven. 

Yesterday did see some positive figures for the US from two data releases. Trade balance figures – previous -48.7B Expected -47.5B Actual -42.9B, so quite a lot less of a drop than was expected. This was also coupled with Initial Jobless Claims – Previous 365k Expected 370k Actual 361K, so rather than an increase of claims there was in fact a drop. The USD strengthened against a basket of currencies following the afternoons release (UK time).

No significant data releases for the US today.