Sterling’s terrible week is nearly over…

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Sterling has had a terrible week, compounded yesterday by a weak retail sales figure and a statement from credit ratings agency Moody's regarding the UK's credit rating.

Only three days ago UK inflation continued its inexorable rise to hit 4.4%, well over twice the 2% target. Logic would suggest a reaction from the Bank of England to tighten the supply of money and restrict consumers' ability to chase prices higher still. Logic would also point to a strengthening of Sterling as investors took a more active interest in the higher returns that it would soon offer. Yet since the inflation data came out on Tuesday morning Sterling has fallen by nearly two and a half cents against the US Dollar, a cent and a half against the Euro, six cents against the Australian Dollar and nearly nine cents against the NZ Dollar. It has even lost two Japanese Yen, the currency that five of the six biggest central banks in the world are holding down with intervention.

Sterling wasn't helped by disappointing February retail sales, falling 1% on the month, worse than expectations of a 0.6% fall, and nearly a complete reversal from January, when retail sales were up 1%. The figure exacerbates concerns about weak consumer spending and the impact this will have on Q1 GDP growth.

Moody's twisted the knife saying that slower UK "growth combined with weaker-than-expected fiscal consolidation could cause the UK's debt metrics to deteriorate" to a point that would threaten the UK's AA credit rating. 

Both the Chancellor and the Governor of the Bank of England believe the UK should not look to the consumer for growth this time around, so the lower value of Sterling will continue to aid UK exports, an area of the economy that officials will be the catalyst for growth.

The problem for Sterling is that the weakness will counteract the clamour for higher UK rates, which is turn will provide no incentive for investors to purchase Sterling. A vicious circle if there ever was one!

The Euro meanwhile is continuing to defy logic, improving despite the collapse of Portugal's government that pushed the country's borrowing costs above 8%. 

Sterling is off the hook today as far as data is concerned. In the US, fourth quarter economic growth and the Michigan University consumer confidence index are released.

As we head towards the end of the week, one wonders if Sterling will manage a sympathy rally. Stranger things have happened.