Sterling already reeling from the credit crunch hitting the financial sector hard, tumbled again today on news of the biggest trade deficit since the aftermath of Nigel Lawson's late 1980's boom which was followed by early 1990's bust. The trade deficit soared to £20billions for the third quarter, in large part the credit crunch is to blame as investment income flows out of the worlds financial centre in London, whereas usually the case is for a healthy surplus. The deficit as a proportion of GDP amounts to 5.7%, and is way ahead of city estimates of 3%.

There is much talk about economic divergence between east and west. Whereas in Britain case its more a convergence towards emulating the United States, with huge trade and budget deficits, rising producer price inflation, rampant money supply growth, a housing market in meltdown despite the earlier upbeat report from RIC's.

The problem with the trade deficit is that for Britain more than most other countries, the financial sector forms a huge part of the countries balance of trade. The credit crisis is expected to hit the earnings of the financial sector hard, as the number of transactions between financial institutions has dried up in light of the higher risks, and hence investment income is expected to continue flowing out of the UK.

The news has further enhanced mainstream press speculation of a recession during 2008. The standing Market Oracle forecast to be expanded on shortly is less pessimistic at 1.5% growth for 2008. It is nonetheless the worst year in terms of growth for over 10 years.

The last analysis of the British Pound of 7th November 07, was when the pound was trading above £/$ 2.10, with an anticipated decline towards its support trend line at 2.03 over the next few weeks. However that support level has long since been breached, with the pound trading as low as $1.98 today. A drop of 6% in just 4 weeks, such a drop is inflationary! The Pound has dropped to major multi-year support at 197.50. This is expected to hold in the immediate futur, however a break below £/$1.97 would imply a probable end of the sterling bull market that would target an initial trend towards £/$1.90 and be highly bearish in terms of sterlings prospects for 2008.

By Nadeem Walayat
Copyright (c) 2005-07 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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