Disappointing production data hold it back
Unexpected Australian job losses deflate the dollar

Sterling's four-cent range was narrower than the previous week and slightly lower, including a record low for the pound. It did not stay down though. When London opened the pound was two and a half cents off its low and a net half cent ahead on the week.

Sterling's mid-week rally happened courtesy of the Bank of England governor. Since the onset of the recession, Mervyn King has not been renowned for his robust promotion of sterling. It would be an exaggeration to say he has seized every opportunity to send it lower, but his pontifications have tended to offer more reasons to sell than to buy the pound. It was something of a surprise, then, when he hinted that sterling interest rates would indeed go up this year. His comments were in the context of the Bank's Quarterly Inflation Report. Although, as expected, the report marked down projections for economic growth, at the same time it marked higher the outlook for inflation.

The inflation report was the highlight of what was otherwise a week of dreary economic data from the UK. The Royal Institution of Chartered Surveyors house price balance improved from -23% to -21%, showing that prices are still falling, just not so quickly as before. Rightmove's whimsical house price index found would-be sellers asking an average of £239k for their palaces - a three-year high and 50% more than the £160k average transaction price reported by HBOS a week ago. Rightmove's press release suggests the mismatch could continue as long as interest rates remain near-zero: ‘One interest rate rise won't immediately derail the market but if we see several in quick succession it will quickly hit the buffers.’

Although positive, the figures for UK manufacturing and industrial production in March were all on the low side of expectations. In February and March together, manufacturing production was up by just 0.2% and industrial production fell by -0.9%. Having already seen the provisional figure for first quarter gross domestic product (it grew by 0.5%), the production figures did not come as a shock. Indeed, they were not miles away from forecast. But they were not good and they held sterling back.

The Australian ecostats were not very impressive either. NAB's business confidence and business conditions measures were both lower in April, confidence by two points at 7 and conditions by four points at 5. Among other things, business conditions were drenched by cyclone Yasi and confidence was dented by the strength of the Aussie dollar.

An improvement in Australia's trade surplus was welcome enough, but the employment figures created all sorts of nuisance for the dollar. In March the Australian economy had added 38,000 jobs. Analysts were forecasting a further 17,000 to have been created in April and investors went for it. They were wrong. Employment was down by -22,100 and 30 seconds later the Aussie dollar was down by a cent and a half.

In common with other high-yielding and commodity-oriented currencies, the Australian dollar suffered at the end of the week as investors fretted about the slow-motion crash of the Greek government bond market. They reduced their holdings of risky assets and stocked up with US dollars and yen because that was just about their only option if they did not like the euro.

This week's Australian data cover vehicle sales, investment and mortgage lending, consumer confidence and wage levels. The Reserve Bank of Australia publishes the minutes of the last monetary policy meeting. Four items on sterling's agenda are loaded with implication for sterling interest rates, and so for the currency itself. Analysts believe UK inflation will have gone up from 4.0% to 4.1% in April and that unemployment will have risen from 7.8% to 7.9%. Retail sales in April should be 2.5% up on the same month last year. The minutes of the May Monetary Policy Committee will reveal whether three of the nine members were still voting for a rate increase or if there has been some backpedalling as a result of softer economic data.

Sterling has picked itself up from an even lower bottom week, but this time seems to have held onto the bulk of its gains.