The British pound sank to a two-month low against the US dollar following another dovish report from the Bank of England. Governor Mervyn King warned investors that despite robust third-quarter economic growth, the UK economy could contract again in the fourth and the central bank therefore stands ready to introduce more pound-devaluing cash injections if necessary. Re-elected US President Barack Obama repeated the threat of the US ‘fiscal cliff’ to keep the safe-haven US dollar steady on the back of declining stock markets. Meanwhile, geopolitical tensions in the Middle East should continue to offer support to the greenback. The euro rose to two-week highs against the under-pressure pound and may continue to progress after German GDP data dampened concerns of Europe’s central economy shrinking.

Sterling

The British pound fell sharply, hitting two-month lows against the US dollar, after Bank of England Governor Mervyn King warned the UK’s economic output over the fourth quarter could turn negative again. King delivered the central bank’s quarterly inflation outlook. Although inflation and growth forecasts were little changed from earlier estimates, he reinstated the bank’s readiness to keep printing money if the British economy continued to suffer from an unreliable global economic environment. The pound also fell to a two-week low versus the euro in response, and the British currency’s decline could expand should UK retail sales data support fresh worries that the BoE may pursue extra monetary stimulus in the months ahead.

US dollar

Notes from the Federal Reserve previous policy meeting showed that policymakers are already discussing ways of expanding current quantitative easing measures to ensure the US economy does not weaken. Concerns of an economic relapse were also underlined by poor US retail sales data showing a fall in consumer spending last month. US manufacturing surveys will be on watch followed by comments from Fed Chairman Ben Bernanke.

Euro

The euro seemed to be in danger of breaking apart over the issue of Greece’s bailout, but there is now some hope that Athens may receive a sizeable chunk of its rescue package at a meeting of eurozone officials. The single currency may also make up further lost ground after GDP data from both Germany and France removed the threat of Europe’s leading economies contracting over the third quarter.

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