The pound reaches a seven month high against the dollar

The so called US ‘fiscal cliff’ remains centre stage, driving the dollar down to multi month lows against a variety of currencies as speculation that a deal in Washington is imminent continues to boost risk sentiment and hurts safe haven flows.

The almost hourly updates seem to suggest that the fine detail is being worked on, albeit amidst non-stop political wrangling.

First, President Obama said that he would veto the so-called ‘Plan B’ from the Republican party, which will be voted on in the House of Representatives on Thursday. In response, Republican speaker of the House, John Boehner, warned the Democrats they will be responsible for the biggest tax-increase in history if they do not give the green light to his party’s Plan B.

The euro continues to steadily improve after better than expected German business confidence data was published yesterday.

Germany's Ifo Institute said its business climate index rose for a second month to 102.4 compared to 101.4 in November.

Credit ratings agency Standard & Poor’s (S&P) took Greece off its 'selective default' (SD) rating and raised its long-term rating to 'B-' citing recent indications that the euro zone is determined to continue to back the Greek government’s efforts and keep the country in the euro zone.

Meanwhile, fellow credit ratings agency Fitch Ratings published a report yesterday in which the agency warned that the euro zone crisis and US fiscal cliff threaten the sovereign ratings on seven of the 10 largest world economies and said it would come to a decision on the matter at some point during 2013.

The report, titled “Euro zone Crisis and US Fiscal Cliff Risk Dominate Sovereign Outlook” notes that the weaknesses in the major advanced economies continue to be “dominated by the continuing Euro zone crisis and the looming threat of the US fiscal cliff”. The report also highlights that seven of the world’s 10 largest economies are currently on 'negative' outlook, including the “triple A” ratings on the UK, the US and France.

In the UK, the Office for National Statistics (ONS) reported that UK consumer price inflation remained unchanged in November at 2.7%, the same as in October.

However, although the headline figure remained unchanged, a more detailed analysis showed a significant upward and downward pressures on CPI annual inflation between October and November.

The largest upward pressures to annual inflation came from food & non-alcoholic beverages which rose by 1.1% and housing & household services whilst the largest downward pressures came from motor fuels and furniture, household equipment & maintenance.

Analysts at Barclay´s Research reported that “While pressures from petrol prices have receded during Q4, we expect the bulk of announced gas and electricity price increases to take effect between December and February, maintaining the upwards pressure on inflation. Tuition fee increases are also likely to provide a sustained source of upwards momentum over the next three years, while we expect low productivity and the resultant strong unit labour costs to cut into firms’ margins, leaving them with little room to trim prices in response to weak demand. As a result, we expect CPI inflation to remain above the 2% target over the near to medium term.”

The pound remains close to a 2 month low against the euro this morning.