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Preview - Sterling Trade Data Reaction Will Be Important
The UK trade data remains prone to erratic shifts on a month-by-month basis, although the underlying trend has been for a slight improvement over the past 2-3 months while volatility has been lower. (see attached chart) The trade data will be watched closely as it will provide important insight into key areas for Sterling. The export data will be important as recent survey evidence has suggested that exports are holding firm. Significant weakness in the export data would increase fears over a deterioration in competitiveness and counter the survey evidence. Import data will also be important as a weak figure would suggest that consumer demand is slowing. The data reaction will also need to be watched as an indicator of underlying Sterling strength, especially with the UK currency being influenced strongly by carry trades. Economic releases are important in more than one way: The information has an impact in adjusting expectations and the data does directly influence the currency level in an initial impact. The market reactions to individual releases are also important indicators of underlying sentiment and this could be the more important aspect of Tuesday’s data, especially given the importance of carry trades for Sterling. If the UK currency proves to be resilient in the face of a higher than expected deficit or rises strongly on a low deficit, then this would indicate underlying Sterling buying is being sustained. In contrast, Sterling weakness on a set of data close to market expectations or heavy losses on a deficit just above expectations would be an important signal that underlying Sterling buying support is fading. In initial headline terms, Sterling is liable to weaken significantly if the deficit is above GBP6.8bn while a deficit below GBP6.0bn would provide near-term support.
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