Sterling fell and gilts rose after data showed UK manufacturing output fell unexpectedly in June and the trade deficit widened, adding to the other recent weak data that give evidence of the sluggishness of the UK economic recovery.
The Office of National Statistics released the data this morning, showing that June factory production declined 0.4 percent from the previous month, when it rose 1.8 percent. Economists predicted a rise of 0.2 percent.
Meanwhile, the goods trade gap widened as falling exports outpaced a drop in imports. Exports fell 4.8 percent in June from the previous month and imports declined 2.4 percent. The goods trade deficit widened to 8.87 billion pounds from 8.47 billion pounds in May, versus a forecast for a shortfall of 8.1 billion pounds. In the second quarter, exports dropped 1.1 percent and imports rose 1.6 percent.
The British economy is affected by the debt crisis in the euro zone, which is the U.K.’s largest market for exports. Concerns of debt contagion due to Italian and Spanish debt were heightened recently as well as a global economic recession due to the recent downgrade of the United States. All of this combined hurt consumer confidence in the U.K. which consequently lead to firms cutting orders and prompting a further drop in output.
Sterling fell 60 pips against the dollar after the data, to a low of 1.6314 from a high of 1.6374 within three minutes.