Economic recovery progress report this week as UK and US GDP due

Friday featured exceedingly disappointing figures for UK retail sales in December. Sales were down by -0.8% on the month and flat on the year. The numbers were considerably worse than the -0.1% fall predicted by economists and coincided with another poor figure for mortgage approvals. Unusually, investors failed to punish sterling for the miserable statistics.

The result was that sterling rebounded almost immediately the data came out and went on to enjoy a comfortable day. It added about half a cent against the US dollar and gained a little ground against the yen. Against most other currencies on the foreign currency exchange market it was steady, only falling back by a fraction against the euro and the Swiss franc. Compared with the Canadian dollar it is unchanged, despite a healthy 1.3% increase in Canada's November retail sales.

Last week the Office of National Statistics showed on Tuesday that UK inflation hit a higher-than-forecast eight-month high of 3.7% last month. This is up from 3.3% in November and is nearly double the Bank of England's 2% target rate. Analysts remain divided over whether the BoE should raise interest rates or hold firm in the face of increased pressure from public sentiment and the government. Sterling managed to gain across the board following the announcement as the market pondered an earlier than expected rise in UK interest rates.

 Midweek headlines were taken by the latest UK unemployment data, with the overall figure increasing by 49,000 to almost 2.5 million in the three months to November.

The state of the economic recovery is tested on both sides of the Atlantic this week as Q4 GDP figures are released in the UK on Tuesday and the US on Friday. On Wednesday the Fed reveals its US rate decision, while at home January's monetary policy committee minutes will be eagerly awaited. US December home sales are in the spotlight with new and pending figures coming on Wednesday and Thursday respectively.

It is however a quiet start to the week, with Eurozone PMI's from the manufacturing and services sector the focus.