LONDON: 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 euro zone, 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 euro zone 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.
"It does hinder the rebalancing process, although not as much as some might say. It depends how realistic you thought the proposition was that we were going to have a major resurgence in manufacturing."
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