Forex Flash: Renewed GBP sparked over weak UK data – RBS

FXstreet.com (Barcelona) - The last set of trade data again highlighted that there has been little improvement in the UK’s net trade position. The UK current account position has continued to deteriorate. This suggests that GBP’s long-term equilibrium is lower than generally thought. This is further evidenced by the continued poor performance of the UK manufacturing sector. “Once one-off special factors are excluded, there is very little evidence that the UK fiscal position, already one of the poorest in the developed world, is improving. By contrast, the US deficit position is narrowing surprisingly quickly.” notes Paul Robson, an FX Trading Specialist at RBS.

A decline in UK productivity increasingly appears to be structural rather than cyclical. There seems little prospect of previously high-performing sectors of the economy returning to their pre-crisis run-rates. Such a poor performance suggests that GBP needs to decline over time to restore competitiveness.

Although upside pressure on price inflation has eased following the pullback in commodity prices, the UK’s relative performance remains very poor. This suggests that the supply side of the economy has been damaged by the financial crisis and that the nominal exchange rate has to fall to compensate.