FX Focus: Pound gains against euro and dollar as UK trade deficit narrows

The pound climbed on Friday (9 September), recouping part of the losses it recorded in the previous session, as a series of economic reports continued the recent trend of dismissing fears of a slowdown in the aftermath of the European Union referendum.

Having fallen sharply against the euro on Thursday, sterling gained 0.07% against the common currency, exchanging hands at €1.1811, and was 0.12% higher against the dollar, fetching $1.3316.

Earlier in the day, data released by the Office for National Statistics showed the UK trade deficit narrowed in July as exports grew helped by a weaker pound following the country's Brexit vote. Britain's deficit in goods and services shrank to £4.5bn from £5.6bn in June, as trade was driven by exports jumping by £800m, while imports slipped back by £300m.

"A narrower trade deficit in July is also consistent with hopes that a sharply weaker pound since the referendum can provide an offsetting boost to the economy via higher exports growth," said Chris Saint, senior analyst at Hargreaves Lansdown currency service.

Meanwhile, construction output was flat in July, defying expectations for a 0.5% decline and rebounding from a downwardly revised 1% drop in the previous month. The sector fared better than expected on a yearly basis as well, with production increasing 1.5%, compared with an upwardly revised 0.7% decline in June and analysts' forecast for a 3.4% slump.

However, Paul Hollingsworth, UK economist at Capital Economics, warned data from the construction sector tended to be volatile.

"While we would caution against reading too much into any one month's figures at the best of times, this is particularly true of trade and construction figures," he said. "After all, both were stripped of their status as National Statistics back in 2014 and tend to be very volatile and prone to large revisions."

Elsewhere, the dollar was broadly flat against the euro but gained sharply against the yen, rising 0.43% to ¥102.93 and continuing the previous session's rally. The greenback could extend its gains even further, after Richmond Federal Reserve's President Jeffrey Lacker made a strong case for a rate hike this month and three other Fed members will speak publicly on Friday.

"A large number of policy makers appear to be coming round to the idea of a rate hike, even those that in the past have typically been quite dovish," said Oanda's senior market analyst Craig Erlam.