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Sterling vs US Dollar exchange rate – Both Britain and US at risk of contagion

Yesterday’s quarterly inflation report from the Bank of England predicted negative growth for the UK economy in the first half of 2012, prompting a decline in the Pound against the Dollar as investors are wary of further Quantitative Easing measures. Unemployment figures showed a rise from 8.1% to 8.3%, leaving a record high 2.62 million people jobless. The figure is especially ominous for young people with unemployment standing at 20.6% for 16-24 year olds.

On a positive note Britain’s 10-year gilts are yielding at 2.0% a fall of 1.3%, and retail sales data released today from the National Statistics also show a glimmer of hope, with a 0.9% rise on last year and a 0.6% rise on last month; analysts had expected a fall of 0.2% on the yearly figure and a static monthly result. The Pound fought back against the Dollar on the back of these unexpected positive retail figures, reaching daily highs around 1.579 but quickly settling at a daily average of 1.573.

US President Barack Obama joined BoE governor Mervyn King in stating that European officials need to take decisive action in order to persuade investors that they have a cohesive plan to effectively end the Eurozone debt crisis, and prevent further contagion. The US is hopeful of expansion in a bid to avoid being infected by the epidemic that is contaminating the markets on our side of the pond; US retail sales rose 0.5% in October; industrial production rose 0.7%; and the NAHB housing market index grew slightly to 20%.

But as Obama reiterated: the Dollar’s status as safe haven from the troubles can only take it so far, and sooner or later the US will be dragged into the mess if affirmative action is not taken.

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