UK trade gap narrows as services strength gives sterling a modest lift

The UK’s external accounts offered a modest but useful offset to the market’s dominant rates-and-fiscal narrative. Excluding precious metals, the total goods and services trade deficit narrowed by £1.1 billion to £9.0 billion in the three months to July 2026. Exports rose faster than imports, the services surplus widened to £52.6 billion, and the goods deficit narrowed only slightly to £61.6 billion.¹

For FX markets, that mix matters. A smaller underlying trade deficit can support sterling by reducing the perception that the UK is unusually dependent on foreign capital at a time of elevated global borrowing costs. But the composition is less clean. The improvement still rests heavily on services exports and surplus generation, while the goods account remains deeply negative.

Services carry the external story

The clearest positive signal in the ONS release was the services balance. In the three months to July, services exports rose by an estimated £1.4 billion, while services imports increased by around £0.7 billion. That lifted the surplus by £0.7 billion to £52.6 billion.¹

Services did more of the work than goods. The goods deficit narrowed by just £0.4 billion to £61.6 billion.¹

That reinforces a familiar UK macro profile: a high-value services exporter with a persistent goods deficit. The July GDP release added to that message. Monthly GDP grew 0.4% in July, with services output also up 0.4% on the month. Over the three months to July, services output grew 0.6% and was the main contributor to GDP growth.¹⁰

For sterling bulls, the alignment between domestic services activity and external services strength is helpful. It suggests the UK’s most competitive sector is still expanding, at least in nominal trade terms, as investors scrutinise whether the country can finance fiscal deficits and external gaps without a larger risk premium.

Goods improvement is real, but not yet decisive

The goods data were more ambiguous. Goods exports increased by £4.7 billion in the three months to July, outpacing a £4.3 billion rise in goods imports. That narrowed the goods deficit by £0.4 billion.¹

In July alone, goods exports rose 2.8% and goods imports rose 2.4%, with exports to both EU and non-EU destinations increasing.¹

There were encouraging details. In inflation-adjusted terms, total goods exports rose 3.5% in July, with exports to the EU up 7.2%.¹ But the monthly goods picture also contained import-heavy signals. Non-EU goods imports rose £1.7 billion, driven mainly by machinery and transport equipment, including aircraft from the United States and cars from China.¹

That makes it hard to claim a broad goods-sector competitiveness breakthrough from one release. The Bank of England’s regional intelligence points in the same direction: goods export growth has improved but remains below normal, while smaller goods exporters continue to cite pressure from tariffs, carbon rules, Chinese competition and post-Brexit effects.¹³

Sterling gets support, not a free pass

The trade figures landed alongside stronger activity data, and sterling responded to the broader macro surprise. Reuters reported that the pound rose after July GDP grew 0.4%, beating expectations for no growth. Sterling was up 0.1% against the dollar to $1.352 and also firmer against the euro.¹⁴

The trade release can strengthen that move at the margin. A narrower deficit improves the UK’s external-balance optics, especially because precious metals are excluded from the headline ONS figures, reducing distortion from volatile non-monetary gold flows.¹ In a global market focused on funding needs, current-account resilience and fiscal credibility, a better trade balance is a useful argument against an outright bearish sterling story.

But it is not enough to replace the rates-and-fiscal debate. UK gilts remain central to the currency narrative. After a sharp sell-off, Reuters reported that 10-year gilt yields had hit a 19-year high of 5.38% on Thursday before easing, while 20- and 30-year yields reached their highest levels since 1998.¹⁵ High yields can support sterling through rate differentials. But if they reflect fiscal risk or inflation anxiety rather than healthy growth, the currency benefit can fade.

The bottom line

July’s trade data give sterling a constructive counter-narrative. The UK’s underlying trade gap is narrowing, services exports are doing the heavy lifting, and stronger GDP confirms that the services engine is still running. That should help investors frame the UK as less of a one-dimensional fiscal-risk story.

The caution is composition. The improvement is still services-led, goods trade remains in a large deficit, and Bank of England contacts continue to describe borrowing costs as a constraint on business sentiment and investment.¹³

For sterling, the release is supportive but not transformative. It improves the external-balance story without yet proving that the UK has solved its goods competitiveness or fiscal-risk problem.

UK trade gap narrows as services strength gives sterling a modest lift

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Services carry the external story

Goods improvement is real, but not yet decisive

Sterling gets support, not a free pass

The bottom line

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