In this week's update:STERLING AHEAD ON ALMOST EVERY FRONTUK retail sales report strongest in three years. Low inflation print suggests no change for AUD interest rates this week.

As far as the UK economic data were concerned it was a low-key week for sterling. Nationwide announced a -0.5% monthly fall in house prices, the Bank of England reported a slight fall in the number of mortgage approvals in June. Gfk's index of consumer confidence was three points lower at -22. The only statistic that made any difference - and it was a positive one - was the CBI's distributive trades survey. It was surprisingly strong with a net 33% of shopkeepers reporting higher sales in July; the strongest reading for three years.

In one of sterling's luckier weeks it had also a minimal amount of non-statistical flak to avoid. The National Institute for Economic and Social Research (NIESR) shot wide when it assessed the risk of Britain's economy falling back into recession next year at one in five. Prior to June's emergency budget that risk was one in seven. NIESR thinks living standards will not return to pre-crisis levels until 2015, roughly the same time horizon recently mentioned by the Federal Reserve in the States. Another damper-than-usual squib was Bank of England Governor Mervyn King's appearance in front of the Treasury Select Committee. His comments were in line with recent Monetary Policy Committee minutes and sparked no reaction from sterling. The governor was evasive at times: Answering a question about the impact of the emergency budget, and the risk of it derailing the recovery, he said 'I don't think it made a significant difference to whether we would get what is technically called a double-dip recession.'

Two inflation measures last week rained on the parade of those looking for higher Australian interest rates. At the beginning of the week the producer price index - factory gate prices - went up by 0.2% in the second quarter of the year after analysts had predicted it would rise by 0.8%. Although that took the year-on-year increase to 1.0% that was still well below the 1.5% annual rise investors had been looking for. The disappointment on Wednesday was even greater when the consumer price index rose by considerably less than the 1% that markets had been expecting. At 0.6% CPI inflation was well short of the level that would make an interest rate increase by the Reserve Bank of Australia inevitable at this week's policy meeting. A survey of 23 economists by Bloomberg found all of them predicting the RBA would leave its benchmark interest rate unchanged at 4.5% on Tuesday.

Taking advantage of Britain's impressive GDP performance in Q2, sterling made it back to the top of the range that has held it for a fortnight. It shows no sign of breaking higher as long as investors lean towards the growth-and-recovery story and continue to favour the currencies with higher yields. Buyers of the Australian dollar should continue to hedge 50% of their requirement.

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