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Sterling hits new short-term highs

Sterling has been very active on the currency markets this week hitting a seven week high against the euro and a six-week high against the dollar. A mixture of positive economic data together with expectations that the UK economy grew by 0.4% in the first quarter of 2010 have added to the bullish outlook in the minds of many investors. However, there may well be some pitfalls on the horizon!

The issue of the UK budget deficit is one which will not go away and has attracted the attention of international bodies around the world. We also have the issue of factory gate prices which increased more than expected in March and pose potential problems with regards to inflation in the short to medium term. When you also throw in the political uncertainty around the UK at the moment, short term albeit, there is the potential for unhelpful news in the short to medium term.

Inadvertently an improvement in the currency rate will also impact on exports which many have pinpointed as a vital factor in the ongoing recovery of the UK economy. If exports fall back as the currency improves there is some fear that domestic demand will not be able to make up the shortfall at this moment in time.

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