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Risk aversion continues to dominate the currency exchange markets

Published: 17 Apr at 9 AM Tags: Pound Sterling, Euro Exchange Rate, Euro Crisis, UK, Economy, Inflation,

A report from the International Monetary Fund (IMF) showing that the global economy is likely to only grow by 3.3% in 2013 gave further impetus to the risk aversion theme currently dominating the world markets. The IMF also trimmed its forecasts for world economic growth for 2014.

In its World Economic Outlook, the IMF said that the world can no longer be defined as a "two-speed recovery", strong in emerging market and developing economies but weaker in advanced economies and in its opinion, we are now seeing the emergence of a "three-speed economy".

The report states that "Emerging market and developing economies are still going strong, but in advanced economies, there appears to be a growing bifurcation between the United States on one hand and the euro area on the other."

The IMF now expects the global economy to expand by just 3.3% this year, down from its January prediction of a 3.5% increase with growth speeding up to 4.0% in 2014, in line with the previous estimate.

Of interest, it also now predicts a deeper contraction of 0.3% in the euro zone in 2013. IMF Chief Economist Olivier Blanchard said that "Europe should do everything it can to strengthen private demand. What this means is aggressive monetary policy and what this means is getting the financial system to be stronger - it’s still not in great shape.”

The IMF predicts that growth in the UK is expected to increase by 0.7% in 2013 and by 1.5% in 2014. Both of these estimates are down by 0.3% from their last prediction published in January 2013.

Meanwhile, the IMF trimmed its forecast for the US economy from 2.1% to 1.9% in 2013 and reduced its 2014 estimate from 3.1% to 3.0%.

The report emphasised the more cautious, risk averse nature that has dominated the world’s markets this week.

In the UK, the Office for National Statistics (ONS) reported yesterday that the consumer prices index (CPI) grew by 2.8% year-on-year in March 2013, unchanged from February, ‘in-line’ with consensus estimates.

According to analysts at Barclays, the stubborn services inflation, despite weak demand means that goods' prices would have to be close to zero for the CPI to head back towards the Bank of England's target. The depreciation in the value of the pound sterling makes this ever more unlikely.

Today sees the publication of UK unemployment data and the minutes of the Bank of England’s Monetary Policy Committee (MPC) meeting from the beginning of the month. The last two sets of minutes showed a 6 to 3 vote against raising the size of the Quantitative Easing (QE) budget from the £375 billion already allocated. Any tightening in the vote would put further pressure on an already fragile pound sterling.
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