The Pound rallied strongly against the US Dollar yesterday, pushing 1.62 against the Greenback. This has been built on continued inflationary pressures in the UK, with the National Institute of Economic & Social Research (NIESR) being the latest research body to raise its forecast for inflation.
Yesterday the NIESR raised its inflation forecast for 2011 to 3.8%, from 2.8%. They suggested that UK inflation may slow to 1.8% in 2012, as the UK government’s spending cuts weigh on the economy. The research group also said that unemployment will rise to 8.7% this year, from 7.9% in 2010.
This statement has come on the back of consistently high official inflation rates, which have been above the Bank of England’s upper limit of 3% for well over a year now. In addition, Andrew Weale a member of the Bank of England’s Monetary Policy Committee wrote in yesterdays Guardian newspaper that interest rates should be increasing.
Also increasing is global growth, especially in Asian and North American economies. This combined with rising debt concerns in the world’s two largest economies (Japan and the USA) is causing a general sell off of risk averse currencies like the US Dollar and Japanese Yen. The Yen has dropped significantly against the Euro over the last week and is down against many of the world’s most traded currencies. Last week Japan had its credit rating downgraded by Standard & Poors from AAA to AA-, which has also weighed on the currency
The US Dollar is also weaker as risk appetite in the market grows. The US Dollar is being sold of in a similar vein to the Japanese Yen as investors seek higher returns. Investors are also looking to offset the risk of inflation in their portfolios so are investing in currencies with higher yields, like the Canadian or Australian Dollar. This has also increased the demand of the currencies of economies where interest rate hikes are on the horizon, like Great Britain and Europe.
