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US Dollar exchange rate seen as a safe haven over the Pound

Yesterday the Pound hit strong resistance at 1.608 against the Dollar and fell sharply throughout the day to lows around 1.588. Inflation data released today by the National Statistics showed an ease in the Consumer Price Index, last period’s score dropped from 5.2% to 5.0%, 0.1% less than the expected 5.1%.

Tomorrow’s UK Jobs report is set to figure at the forefront of many investors’ minds as unemployment currently stands at 8.1%, the highest in 15 years, and could easily rise without some kind of substantial economic input. If unemployment continues to rise and inflation continues to drop, contrary to the Government’s deficit-reduction plan, the Coalition could fall under increased pressure to act.

It will be interesting to see exactly what the Monetary Policy Committee are planning to do in order to bring the UK back on track in Governor King’s speech – Mervyn King is the chairman of the Bank of England. Falling levels of inflation, employment and sales are likely to fuels concerns that the MPC will be forced to consider bolstering Quantitative Easing further in 2012.

The Dollar is strengthening against the Pound on the back of this negative economic growth forecast. The Pound is suffering, in terms of risk-aversion, from its close ties with the Eurozone; investors are viewing the Dollar as a safer haven than the Pound. Consequently Italy’s 10 year bonds – once more yielding above the psychological 7.0% mark – coupled with Greece and Spain’s economic turmoil, have prompted markets to sell the Euro and invest in the Dollar.

As we await Mervyn King’s speech tomorrow, the economy appears to be falling into contraction and a recession seems all the more likely; the currency exchange markets reflect this with the Pound falling to 1.586 against the Dollar.

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