Sterling surged to a 19-month peak on a trade-weighted basket of currencies on Thursday, posing risks to exports and the British government's aim to rebalance the economy. Trade-weighted sterling rose to 82.4, its highest since August 2010 according to Bank of England data. Its rise came as data showed the UK's trade deficit deepened more than expected in February to 8.772 billion pounds as imports outpaced exports.
Exports to the eurozone, the UK's largest trading partner, ticked up. But as concerns about Spain's fiscal position pushed sterling to a three-month peak of 82.27 pence versus the euro, some strategists said the trade gap could widen as demand from the eurozone falters.
Many market players said sterling could climb further against the euro, breaking through resistance at the 2012 high of 82.22 pence to rally towards 80 pence. Such a move could challenge policymakers' aim of reinvigorating the UK economy through export growth.
"The sterling move right now, in their heart of hearts, they (the BoE) would probably prefer not to happen," said Simon Derrick, head of currency research at Bank of New York Mellon.
Trade-weighted sterling has fallen about 22 percent from around 106 in 2007, and its relative cheapness to other currencies was seen as a factor that would help boost exports. The euro is the largest component on sterling's trade-weighted index, making up 49.3 percent. While exports have supported the UK economy the benefits have not been as great as politicians hoped for. Indeed, many analysts said the government's plans looked increasingly unviable, irrespective of recent sterling strength, given signs of a slowdown in eurozone and global growth.
Thursday's trade data, however, highlighted how the deficit widened primarily because of a dip in non-EU exports, another point of concern as sterling rallied across the board. The pound rose 0.3 percent against the dollar to $1.5957, within sight of a five-month high of $1.6063 hit on April 2.
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