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Sterling lost weight yesterday as details of the UK trade balance showed a country that was still very heavily reliant on imports. The value of goods and services brought into the country rose to an 18 month high while exporters were hindered by the deterioration of our biggest trading partner, the Eurozone.

Something like 50% of the UK’s exports are bound for EU member countries and given the problems they currently face exporters have simply not seen the levels of demand they should have given the recent weakness of sterling. The ‘export-driven’ recovery has barely got out of the driveway yet.

This dragged sterling lower on a day when most people were still looking over the details of the Bank of England’s Inflation Report. It was bearish in tone but David Cameron and his Treasury team will have received a boost with the ringing endorsement that Mervyn King gave to their deficit reduction plans.

Sterling even lost ground against the euro yesterday; the single currency falling into the 1.25s against the dollar on further fears of contagion and violence spread. Portugal released a series of tax measures designed to cut their deficit and raised the spectre of Greek-style violence. These included cuts in public sector workers’ pay by 10% and an increase in VAT to 22.5%. We expect a similar rise in VAT from George Osborne in his emergency budget although 20% is more likely.

We did see a late sell off in risky assets yesterday as  the market reacted to the news that New York’s attorney general is investigating eight banks to find out whether their dealing in the subprime mortgage market misled rating agencies. There was also news of a bomb blast outside of a maximum security prison in Athens which had everyone a little nervous as well.

Data today includes the volatile retail sales measure from the US. A stronger figure would increase the belief behind a strong US recovery and see dollar strengthen throughout the afternoon session.

Have a great weekend