An increase in Britain's trade deficit in January surprised the market Tuesday, sending the pound tumbling.

Data from the Office for National Statistics showed the UK's deficit on trade in goods widened to £7.99bn from £7.01bn the previous month, about £1bn more than economists had predicted.

A drop in exports by £1.4bn to £19.5bn and decline in imports by £0.5bn to £27.4bn was behind the biggest January deficit since August 2008.

The total trade deficit to £3.77bn at the start of the year, and up from £2.60bn in December, also a 17-month low.

"There is no getting away from the fact that the January trade deficit are disappointing and also worrying for hopes that the economy can rebalance over the coming months," said Howard Archer, chief UK economist at IHS Global Insight.

"Net trade is set to be a drag on the economy in the first quarter of 2010 as it was in both the fourth and third quarters of 2009."

Archer thinks the biggest disappointment in the January trade data was a 6.2% month-on-month drop in traded goods excluding oil, but remains optimistic.

"We are still hopeful that net trade will make a positive contribution to UK growth in 2010 as car imports wind down as the car scrappage scheme comes to an end and overall imports are limited by likely gradually improving domestic demand."

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