Despite contraction in the UK economy and increasing government borrowing, the medium term outlook for sterling is positive, according to foreign exchange business Caxton FX. The forthcoming Budget is likely to make grim reading as the scale of the UK's deficit becomes clear, but a recent upturn in the performance of sterling points to a more promising future. In recent weeks the currency has risen to almost $1.50 and €1.13 as stock markets have improved markedly, amid increasing confidence that the financial sector may have passed the worst. Experts have said that, as a result, the demand for safe currencies like the dollar has decreased while there is an increased appetite for riskier currency such as sterling. Alex Dunn, senior analyst, said that while the Budget will highlight serious problems within the UK economy, the recession may be bottoming out and that the cycle of rate cuts had come to an end. "The euro economy is weak and the European Central Bank is likely to cut rates further and move towards quantitative easing. The dollar is likely to weaken as risk appetite returns to the markets. As a result we are now looking for sterling to rise in the medium term even if next week is volatile," he added
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