GBP/USD advances as the UK trade deficit narrows to 1-1/2-year low

The pound advanced against the US dollar on Friday, as a government report revealed the UK trade deficit unexpectedly narrowed to the lowest level in almost 1-1/2 years.

GBP/USD hit a session low at 1.6303, after which the pair advanced 0.08% to trade at 1.6336 at 10:10 GMT. Support was likely to be received at February 6th low, 1.6273, while resistance was to be encountered at February 3rd high, 1.6438.

A report by the UK National Institute of Economic and Social Research revealed the trade deficit of the country narrowed to 7.72 billion pounds in December from upward revised 9.8 billion pounds a month ago, marking the lowest trade deficit since September 2012. Analysts had estimated that the UK trade deficit will just narrow to 9.3 billion pounds.

However, gains were limited as a separate report showed the nations manufacturing production declined in December.

Data showed the UK manufacturing output increased 0.3% in December, after being flat in the preceding month. However, analysts had expected the manufacturing production will surge by 0.6%. On year-over-year basis, manufacturing output slowed its pace to 1.5% in December, from 2.8% in the previous month. Analysts had projected the manufacturing production will slow its pace to 2.3%.

BoE’s Monetary Policy Committee (MPC) reported yesterday that it will keep its benchmark interest rate unchanged at a record low 0.5%. MPC also decided to leave its quantitative easing program of monthly asset purchases unchanged at 375 billion pounds.

The minutes of yesterday’s policy meeting of the central bank are scheduled to be released on February 19th.

Last week, the Governor of Bank of England, Mark Carney, commented that the UK economy has to strengthen more, before policy makers start scaling back their monetary stimulus.

In 2013, the UK economy expanded at the strongest pace in six years, which pushed the unemployment rate to 7.1% during the three months to November, just above the 7% threshold that the Monetary Policy Committee (MPC) pledged to use as a benchmark for raising the record-low benchmark interest rate. According to the UK Office for National Statistics (ONS), this was the largest decline in unemployment since 1997 and the lowest level since May 2009.

According to BoE’s minutes from its January meeting, the unemployment may hit the central bank’s 7% threshold “materially earlier” than estimated. However, the minutes also revealed that policy makers did not feel pressured to take immediate actions for raising interest rates, if the threshold is reached too soon. Yesterday, Mark Carney also reiterated that the MPC did not need to take immediate actions for raising costs of borrowing.

Nevertheless, according to Neil Jones, head of European hedge fund sales at Mizuho Bank Ltd. London, cited by Bloomberg:“The Bank of England is probably going to be the first central bank in the developed market to raise interest rates,” as the UK economy continues to strengthens.

The sterling has appreciated 8.5% in 2013, marking the best performance among the 10 developed-nation currencies, which are tracked by Bloomberg Correlation-Weighted Indexes. At the same time, the US dollar has risen 4%.

Meanwhile, demand for the US dollar came under pressure, following a report by the US Bureau of Economic Analysis, which revealed that nation’s trade deficit widened to 38.7 billion USD in December from 34.25 billion USD during the preceding month. Analysts had forecast that the deficit figure will widen at a lesser pace to reach 36 billion USD.

However, the number of initial jobless claims in the United States came in at 331 000 during the week ended February 1st, down from 348 000 in the previous week and less than expectations of 335 000 more people, who filed for unemployment assistance.

The Department of Labor in the country may report that non-farm payrolls increased by 183 000 in January, after in December US employers added 74 000 jobs, or the smallest change since January 2011.

The rate of unemployment, at the same time, is expected to remain steady at 6.7% in January. The official figures are to be released at 13:30 GMT today.

On Wednesday Automatic Data Processing Inc. (ADP) said that nation’s private sector added 175 000 new job positions in January, below expectations that jobs may grow by 189 000. In December economy managed to add 227 000 jobs.

Elsewhere, AUD/USD slid to a session low at 0.8922 at 1:17 GMT, after which consolidation followed at 0.8943, down 0.18% for the day. Support was likely to be received at February 5th low, 0.8874, while resistance was to be met at February 6th high, 0.8980, also the highest point since January 14th. The pair is still advancing over 2% on a weekly basis and is poised to register its most formidable gain since the week through October 18th.