UK net trade a drag on GBP, but weaker currency to support exports in near term

The GBP appreciated as the equity prices rose and oil prices recovered, on par with expectations. Hence the theory that global factors prevail has been vindicated, noted Nordea Bank. However, in the same period, the possibility of a Brexit has not declined; rather, the “leave” camp has increased in the past few months, based on the polls. One of the major threats in the UK exiting from the EU is the huge current account deficit. According to the latest data, the current account deficit has widened to more than 5% of the GDP.

Indeed, this suggests that the UK is relying on foreign flows; however, it also signifies that foreigners are quite willing to finance it. As long as there is a willingness amongst foreigners to invest in the UK, there is sufficient capital to finance buying of foreign goods, said Nordea Bank. Hence, the recent widening of current account deficit indicates that there has been an increase in foreign financing.

Anyways, the huge current account deficit will continue to be the main concern for the market about Brexit. Hence, this makes the sterling weakest amongst the G4 currencies. Recently, the GBP has been weighed on by net trade. This has been a reason of worry for the Bank of England. However, the weakening of sterling by almost 10% is expected to assist exports in the near term, said Nordea Bank.

“Thus the trade balance flow will be less GBP negative”, added Nordea Bank.