The trade deficit narrowed but by less than expected in May. At £17.92 billion, the shortfall was down from April's smaller revised £19.44 billion but still nearly £2 billion above the market consensus. Moreover, the headline improvement simply reflected a sharper monthly fall in imports (4.6 percent) than exports (2.5 percent). Indeed, courtesy of sizeable declines in sales of machinery and transport equipment to the EU and in non-EU purchases of fuel, exports now stand at their weakest level since January 2022.

The red ink with the EU fell from £12.48 billion to £11.06 billion as exports dropped 3.3 percent and imports a much steeper 7.0 percent. However, this was only a 2-month low. At the same time, the shortfall with the rest of the world was little changed at £6.86 billion with exports down 1.8 percent and imports 1.7 percent.

The May report leaves a deteriorating trend in the goods balance which, combined with the marked weakness of exports, cannot be good news for the pound's medium-term outlook. That said, more generally, today's updates put the UK RPI at 6 and the RPI-P at 11, both measures showing a very modest degree of overall economic outperformance.

The overall goods deficit is expected to narrow from £19.61 billion in April to £16.1 billion in May.

The merchandise trade balance measures the difference between imports and exports of goods. The level of the international trade balance, as well as changes in exports and imports, indicate trends in foreign trade and can offer a guide to an economy's competitiveness. Data are supplied by over 30 sources including several administrative sources, HM Revenue and Customs (HMRC) being the largest.

Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends here and abroad. While these trade figures can directly impact all financial markets, they primarily affect currency values in foreign exchange markets.

Imports indicate demand for foreign goods and services in the UK. Exports show the demand for UK goods in countries overseas. The pound sterling can be particularly sensitive to changes in the trade deficit run by the United Kingdom, since the trade shortfalls create greater net demand for foreign currencies. The bond market is also sensitive to the risk of importing inflation. This report gives a breakdown of trade with major countries as well, so it can be instructive for investors who are interested in diversifying globally. For example, a trend of accelerating exports to a particular country might signal economic strength and investment opportunities in that country.

The UK's trade balance is particularly susceptible to swings in the oil account and so within the overall goods balance, financial markets will normally focus on the balance excluding oil and other erratic items.