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Currency Watch: Markets moving on from Greek drama

With the Greece deal signed, and the world stepping back from the precipice of dealing with a messy default (for another 6 months at least), thoughts must turn to where the market’s focus will now shift.

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Greece has been the market story for the past month or so, to the detriment of everything else.

While politicians will continue to spin the results of Monday’s meeting for weeks to come, money will be looking for something else to focus on. However, so far it certainly hasn’t been the pound that traders have been buying.

Sterling has slipped against both the US dollar and the euro this week as fears over the UK’s economic ties to Europe persist.

The UK has obviously benefited from having the ability to set its own monetary policy, but with 70% of our exports being bought by European customers, the long term prospects for our manufacturers are difficult.

Traders have taken account of this by marking down the value of the pound.

The Bank of England’s record of causing the pound to weaken was also continued, with the minutes from the latest meeting showing that two members of the MPC agreed with us that £75 billion of additional asset purchases should have been utilised, as opposed to the prevailing consensus view of £50bn.

David Miles and Adam Posen, the two most dovish members of the committee, voted for the increase arguing that there was a risk of a prolonged period of depressed demand that would cause inflation to fall below target in the short term.

As I have said before, we think that 2012 is the year that inflation will finally start to move lower and QE will be instrumental in ensuring that a slip into deflation does not materialise.

Falling prices seems like a good thing for you and me; unfortunately the accompanying shift in demand and expectations of further price falls would later prove to be a more painful problem than most would think.

Jeremy Cook is chief economist at World First foreign exchange

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