A combination of higher inflation and weaker growth will not be a positive combination for Sterling in the medium term even if there is a further near-term corrective recovery.
Sterling remained more resilient on Thursday, pushing to highs near 1.98 against the dollar and 0.7420 against the Euro. There was a partial correction in US trading, but it still secured net gains on a wider correction from recent heavy losses. The UK currency struggled to hold above 1.97 against the dollar on Friday and then fell sharply after the UK data.
The UK retail sales data was weaker than expected with a 0.4% decline for December while there was also a decline in prices over the year which will maintain fears over a sharp slowdown in consumer spending.
There were mixed comments from Bank of Deputy Governor Gieve on Thursday. While he expressed considerable unease over the growth outlook on credit fears, Gieve also warned that there would be significant upward pressure on inflation over the next few months. There will still be strong confidence that interest rates will be cut in February, but with some increased doubts whether the bank will be able to cut aggressively over the next few months because of the inflation concerns.