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The Pound Falls Against the Euro and US Dollar exchange rates

The Pound suffered against both the US Dollar and the Euro yesterday due to a mixture of deteriorating economic outlook and safe haven risk aversion. Rightmove PLC released data outlining a large decline in UK house prices as the economy risks falling into contraction in the fourth quarter.

Prime Minister David Cameron cites the UK’s close exposure to the sovereign debt crisis in the Eurozone as the cause of financial worry; he described Britain’s progress as “well behind” in terms of growth and his sentiments are mirrored by the markets. Investors are placing their trust in safe haven assets, with the US Dollar and Japanese Yen benefitting significantly.

US ratings agency Fitch commented that America could be heading for a debt downgrade unless the US Congressional Committee agree on a practical solution to its budget deficit. Globally however, the Dollar remains a staple of the market, also gaining against the commodity currencies such as the Australian Dollar, South African Rand and New Zealand Dollar.

In the Eurozone France faces a tough battle to keep its AAA top credit rating as analysts explicitly state that France’s 85% of GDP debt burden and €681 billion of financial debt holdings are causing it to function below AAA standard. There is speculation that French 10-year bonds could reach 5% if no action is taken to preserve fiscal unity in the Eurozone imminently; analysts have predicted contagion as the Eurozone’s financial core – Austria, Finland, the Netherlands and Luxembourg – are feeling the knock-on effect from the poorly managed nations of Greece, Italy and Spain.

The threat of the 17-nation bloc collapsing is of dire consequence for the UK, considering its close ties and huge trade partnership with the EU.

Public Sector Net Borrowing fell from £11.38 billion in September to £3.39 billion in October, whilst showing an improvement the figures show a negative deficit. Later on today the US Bureau of Economic Analysis will release the Gross Domestic Product for the US in the third quarter; it is expected to show a positive figure of 2.5% growing from 1.3% in the second quarter.

Although the Euro is the main cause for concern it does not appear to be suffering in the short term, with the Pound trading at 1.155 against it. The flight to safety has perplexingly affected the Pound more than the Euro with Sterling trading at a low 1.565 against the US Dollar. As the debt crisis spreads around Europe the Euro’s relatively strong position will come under extreme scrutiny.

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