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Markets continued to digest the weaker US Non-Farm Payrolls data placing the US Dollar under continued pressure at the start of the week as it provided further evidence of the global slowdown.

The pound further advanced on Monday as improved sentiment and the weaker US data saw traders carry on scaling back their short pound positions.

However, pound advances were short lived as data for the week painted a less than optimistic picture for the British economy going forward; The Royal Institute of Chartered Surveyors House Price data dropped to -76.0% in January, analysts had expected prices to improve to -70.0% from the previous -73.0%. UK jobs data did little  to stem the pounds fall, while the data was somewhat mixed the unemployment rate increased to 6.3% for the prior 6.1% with average hourly earnings stagnating at 3.6% in line with expectations.

With these figures in mind traders braced themselves for the Bank of England’s Monthly Inflation report. The central bank assessment of the UK economy greatly disappointed markets and renewed fears of a accelerating and deepening recession. The report indicated the central bank was of the opinion that the UK economy was in a deep recession and that the risk to economic growth lay heavily on the down side. The Bank of England cut growth forecasts sharply, indicating the economy will shrink by 4% to mid-2009 rather than the previously estimated decline of 3% for the whole of 2009.

On inflation the outlook is little changed with inflation expected to dropped well below the banks 2% target, if interest rates remain at their current levels.

On the back of the inflation report Bank of England Governor Mervyn King stated that “unconventional measures” to boost the amount on money available in the economy.

The report and accompanying statements indicated the following; firstly that interest rates are likely to be cut further and secondly that fiscal measures going so far as to possibly printing more money are becoming increasingly likely. Neither of these assumptions being likely to provide any real support for sterling.

It wasn’t however all doom and gloom for the pound, with plenty of EU and US data to still be digested by markets. The European Central Bank Monthly Report painted a similar picture to that of the Bank Of England Inflation Report, the governing Council expects inflation to drop further as commodity prices continue easing and still acknowledge that there is a definite slow down in European economies. They went on to state that uncertainty remains high but despite lower inflation the risk to this picking up in the second half of 2009 was significant enough to warrant caution. The report has however opened the door for further monetary easing by the European Central Bank.

While the pound regained losses against the euro, US data allowed it to advance against the US Dollar as well. Business Inventories in the US dropped by more than expected at -1.3%, expectation was for inventories to pick up in January to -0.9% from the prior release of -1.1%. The previous figure was also revised down adding to the market disappointment resulting from the weaker number.

But as is the norm with sterling of late, trends are hard to come by and movements tend to be volatile and short-lived. As the recovery of equity markets had supported a pound recovery throughout the week it proved its undoing as well. With the G7 meeting in Rome this weekend nervousness of the possibility of discussions surrounding currency volatility saw some equity markets trading lower and weighed on the pound, even the much weaker than expected University of Michigan economic sentiment index from the U.S. did nothing to reverse sterling’s losses. As with the G20 meeting likely focus for the G7 will be Japanese Yen strength and Sterling weakness, again markets will want to see if the G7 communiqué will mention sterling weakness.