The UK’s non-EU trade balance fell in March. It moved from £-7.097bn in the previous period to £-15.195bn.
This means the gap between exports and imports with non-EU countries widened. The March figure shows a larger deficit than before.
Implications For Sterling
The sharp widening of the non-EU trade deficit to £15.2 billion is a significant bearish signal for the British Pound. This record gap, confirmed by the Office for National Statistics to be driven by rising fuel and machinery imports, means a larger supply of sterling is being sold on foreign exchange markets. We should anticipate downward pressure on GBP/USD, especially as the pair has already slipped 2% in the last month to trade around 1.2250.
This points towards positioning for a weaker sterling in the coming weeks. Traders could consider buying put options on GBP/USD, setting strike prices below the current spot rate to profit from a potential decline towards the 1.20 support level seen in late 2025. Short-selling GBP futures contracts is a more direct strategy to capitalize on this expected weakness.
This trade data is particularly concerning as it comes just after April’s inflation figures unexpectedly rose to 2.8%, reversing a steady downward trend. The widening deficit will likely feed into this inflation problem by making imports more expensive. This puts the Bank of England in a difficult position ahead of its June meeting, making any anticipated rate cuts less likely.
We believe the market may now start to price out any remaining expectations for a summer interest rate cut. The combination of a weak currency and stubborn inflation may force policymakers to maintain a hawkish stance. Derivative plays on Short Sterling (SONIA) futures could be used to bet on UK interest rates remaining higher for longer than previously anticipated.
Potential Equity Market Effects
Paradoxically, a falling pound could provide a boost for the FTSE 100 index. Many of its largest companies earn the majority of their revenue in US dollars, and a weaker sterling inflates the value of these overseas earnings when converted back. This relationship was clear during the currency weakness of 2023, where the FTSE 100 showed notable resilience, suggesting we could consider call options on the index.
