Pound Weakens as Britain's Current-Account Deficit Widens

  • Deficit increased to 7 percent of GDP, most on record
  • Sterling slides most in more than a week versus euro

The pound weakened for a second day versus the euro as data showed Britain’s current-account deficit widened in the fourth quarter more than economists forecast to the most on record as a percentage of gross domestic product.

Sterling slid against 15 of its 16 major peers. It erased a decline versus the dollar as a separate report showed the U.K. economy grew more than previously estimated at the end of 2015. On a trade-weighted basis, the U.K. currency posted its worst quarter since 2009 amid concern that if Britain votes to exit the European Union on June 23 it would hurt economic growth. A so-called Brexit could also make it harder for the nation to fund its current-account deficit with overseas investment.

“The current account deterioration was more notable than the GDP revision,” said Steve Barrow, head of Group-of-10 strategy at Standard Bank in London. It’s “not helpful when you’re going to have a referendum on whether to split from your major trading partner. The headlines hurt sterling a bit, but the breakdown is not as bad as the headline might suggest. Weak commodities are eating into investment income for companies with overseas operations. If commodities recover, so should this part of the current account.”

The pound depreciated 0.4 percent to 79.15 pence per euro as of 4:15 p.m. London time. Sterling was little changed at $1.4390. According to a Deutsche Bank AG trade-weighted measure, the U.K. currency has dropped 5.9 percent this year, the biggest quarterly decline since September 2009.

Deficit Widens

The current-account deficit -- the difference between money coming into the U.K. and money sent out -- widened to 32.7 billion pounds in the fourth quarter. It increased to 7 percent of GDP, the most since records began in 1955.

Gross domestic product rose 0.6 percent in the fourth quarter instead of the 0.5 percent previously estimated, the Office for National Statistics in London said. There were upward revisions to services, industrial output and construction. GDP rose 0.4 percent in the third quarter.

While the GDP data offered some respite for the pound, options point to more weakness, with the premium for protecting against sterling losses over contracts betting on a gain versus the dollar reaching a record Wednesday, according to three-month risk reversals.

Data Thursday also showed consumer confidence stayed at the lowest level in more than a year, according to GfK’s index. The Bank of England said earlier this week that officials were ready to support financial stability as they warned of the threats stemming from the EU referendum.

Traders aren’t pricing in an interest-rate increase from the central bank this year, another factor weighing on the pound. The U.K. currency has fallen at least 2.5 percent against all its 16 major counterparts this quarter.

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