Trade data hurts Sterling - 11-07-06

Sterling weakened to lows near 1.8365 against the dollar on Monday before pushing back above 1.84 and was holding close to this level on Tuesday as the dollar retained a firm tone. Sterling was able to maintain a firm stance against the Euro at close to 0.6920 and strengthened to 0.6910 in early Europe on Tuesday before weakening after the trade data.

International yield considerations will remain important and the probability of a tough ECB stance on interest rates will limit the potential for strong short-term Sterling buying even if the UK currency can secure further limited short-term gains.

The trade account recorded a global deficit of GBP6.8bn for May after a revised GBP5.6bn deficit the previous month, with the account undermined in part by a return to deficit for the oil account. There will be underlying concerns over the trade account as the underlying trend is for deterioration, although the impact will be limited by the fact that the recent current account data was better than expected.

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