British Pound Weakens Amid Economic Contraction and Trade Deficit

British Pound Weakens Amid Economic Contraction and Trade Deficit

The British pound fell against major currencies during Friday’s European trading session following disappointing economic data from the United Kingdom. A marginal contraction in the U.K. economy for the second consecutive month, along with a widening trade deficit, fueled the decline.

U.K. Economy Contracts Again

According to the Office for National Statistics (ONS), the U.K.’s real gross domestic product (GDP) shrank unexpectedly by 0.1% in October, mirroring September’s contraction. Economists had forecast a 0.1% growth, but the decline was driven primarily by a 0.6% drop in industrial production, with significant decreases in manufacturing and mining sectors.

Services output stagnated in October, while construction output fell by 0.4%, reversing a modest 0.1% growth in September. On an annual basis, GDP growth improved slightly to 1.3% from 1.0% in September but fell short of the 1.6% forecast.

Widening Trade Deficit

The U.K.’s trade balance also presented concerns. The visible trade deficit expanded significantly to GBP 18.96 billion in October, up from GBP 16.32 billion in September and exceeding the forecast of GBP 16.1 billion. Despite a rise in the services trade surplus to GBP 15.3 billion from GBP 12.9 billion, the overall trade shortfall grew to GBP 3.7 billion, slightly higher than the previous month’s GBP 3.5 billion.

Market Response and Consumer Sentiment

The pound reacted negatively to the weak economic indicators, falling to a 1-week low of 0.8301 against the euro, a near 2-week low of 1.2619 against the U.S. dollar, and a 2-day low of 192.86 against the yen. Against the Swiss franc, it edged down to 1.1277. Analysts predict potential support levels at 0.84 against the euro, 1.24 against the dollar, and 189.00 against the yen.

On the brighter side, the GfK consumer sentiment index showed slight improvement in December, rising one point to -17, signaling marginally better consumer confidence.

Global Developments

Investors are also monitoring political developments in France, where President Emmanuel Macron is set to announce the appointment of a new prime minister.

Looking Ahead

Key economic releases, including the U.K.’s NIESR monthly GDP tracker for November and data from Canada and the U.S., are anticipated later in the day.

Conclusion

The British pound’s weakness underscores ongoing economic challenges in the U.K., including sluggish growth and widening trade deficits. While slight improvements in consumer confidence provide a glimmer of hope, addressing structural economic issues will be crucial for long-term recovery.

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