STERLING FAILS TO IMPRESS

Investors focus on the weak aspects of UK inflation and employment data
More unimpressive data from the Australian economy.

A two-and-a-half-cent range saw sterling hold steady-ish on Monday and Tuesday before swinging down on Wednesday and back up on Friday. When London opened this morning the pound was an insignificant 30 ticks up on the week.

A busy week for sterling contained a rough balance of good news and bad news, although investors could not always agree which was which. Tuesday's consumer price index (CPI) data showed inflation jumping back up to 4.5% in April after March's temporary setback. What might have been a positive event for the pound, with its implication of higher interest rates, turned out to be the dampest of squibs. One reason was the underlying assumption that the Monetary Policy Committee (MPC) has not the remotest intention of increasing interest rates until it absolutely has to. The other was the quarterly exchange of letters between the governor and the chancellor that appeared to rubber-stamp that approach. The chancellor's response was to "welcome the MPC's continued commitment to respond flexibly to the economic outlook".

Wednesday's employment report was seen almost universally as a negative for sterling. Although more people were in work and the rate of unemployment went down again, investors chose to focus on the increase in the number of dole-claimants. It will not have helped that, at a time when the government is supposed to be cutting expenditure, not only were basic public sector wages 11.6% higher than in the private sector, they were also rising more quickly; by 2.5% in the year to March compared with the 1.9% average increase across the private sector. Even April's strong 21.1% monthly and 2.8% annual increase in retail sales failed to impress investors. They put it down to three bank holidays and a royal wedding; events that will not be recurrent.

On the positive side, the Bank of England's chief economist, Spencer Dale, turned out not to be as flaky on tighter monetary policy as the market had feared. He is one of the three MPC members who have been voting regularly for higher interest rates. There had been a suspicion with that the flagging economy and the departure of Andrew Sentance, the hawks' ringleader, Mr Dale might step back from his call for a rate increase. He scotched that impression in an interview with the Financial Times. Whilst he is "not at all confident that the recovery has taken hold", he is "even more worried about what’s going on in terms of inflation".

It was another week of mediocrity for the Australian economic data. All were weaker than the previous month, weaker than forecast or both. New motor vehicle sales fell by -3.5% in April and were -8.4% down on the same month last year. Home loans fell by -1.5% in March and the decline for February was revised from -4.0% to -4.7%. Consumer confidence reversed from +1.2% to -1.3%. Wages went up by 0.8% in the first quarter of the year, having been forecast to rise by 1.1%.

None of that mattered too much in the early part of the week when investors had a spring in their step and an appetite for commodity-oriented currencies with high interest rates. But that attitude went for a ball of chalk on Friday when ratings agency Fitch downgraded Greek government debt and said that the rescue proposed by the EU and the IMF would amount to a default, whatever fancy name they gave it. A lot of investors suddenly became very nervous and lightened their holdings of risky assets, including the Aussie dollar.

The coming week's Australian figures are the leading economic indicators, construction work, consumer inflation expectations and private capital spending. None of these will be as important as the outcome – if there is one – of the Greek government debt fiasco.

Of the few UK data coming out the most important will be Tuesday's public sector net borrowing figure and Wednesday's first revision to first quarter GDP. Best guess at the moment is that it will reaffirm the 0.5% growth shown in the original estimate. Anything lower would be likely to hurt the pound.

It is possible that investors are lining up for a change of heart on the global economy and the commodity currencies but it is too early to call a reversal of the Aussie's two-month rally.