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Sterling suffers a further setback on rates outlook

The UK currency came under yet more selling pressure today with the general opinion in the currency markets the UK base rates will remain lower for longer than countries such as the US and those in Europe. As a consequence, sterling has taken a battering in the currency markets this week with investors fleeing to currencies which they believe have more short to medium term potential for recovery. So where does this leave the UK?

As sterling continues to tumble, the cost of living, i.e. the cost of imports, will increase in the UK but the cost of exporting will be more competitive. So we could end up in a bizarre situation whereby exports are increasing and UK economic activity is on the up, while the cost of living in the UK is pushed higher than both inflation and wage growth.

Many people believe that the Bank of England would prefer sterling to fall further in the currency markets which would encourage exports, build up business, secure jobs and ultimately pump more life into the UK economy. However, there is certainly much more to this story than meets the eye and it could turn into a very difficult and potentially uncontrollable situation for the government.

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