httpvh://www.youtube.com/watch?v=OjaTNBZUafo

The combination of strong economic data and a banking sector buoyed by the stress tests acted as a vitamin cocktail for the pound yesterday as it fought back after a wobbly 48hrs of trade.

CBI Distributive Trades, a proprietary measure of retail sales, showed that 33% of retail businesses have seen an increase in demand from the same time a year ago; comprehensively beating the consensus view of -5%. While 12 percentage points of the 33 are down to a new calculation system this was still a big beat. Both the rate of sales and sales expectations have risen dramatically signaling that retailers are bullish moving forward although these figures do stand in contrast to the somewhat cautious notes that some high street brands (Halfords, Matalan, Marks & Spencer) have published with their quarterly earnings. We do however expect to see these and other retail and growth figures moderate lower through Q3 and Q4 as the government’s austerity measures take hold.

As I said the other main driver was banking shares. They have been going bananas since the stress tests announced on Friday. Lloyds finished 8.79% higher with RBS up 7.89% and Barclays 7.57% with the belief that earnings from European banks would continue to be bullish.

Overnight the NIESR has published its estimates of UK GDP moving through 2012. It has raised its estimate for 2010 to 1.3% from a previous of 1.0% but reduced its figures for 2011 to 1.7% from the 2.0% figure it predicted in May. They also expect inflation on a CPI measure to moderate lower in the coming years from an average of 3% in 2010 to 1.4% in 2012. The news however that is grabbing all the headlines is on the housing market and that house prices are likely 30% overvalued and are likely to fall in ‘real’ terms (accounting for inflation) to levels seen in 2003 by 2015.

Regardless sterling is pounding higher and breaking into the 1.56 level against the USD but is being kept below the 1.20 level by a stiff euro.

I do expect sterling to fall and for one reason; Mervyn King (cue dramatic music, a woman faints at the back). Mervyn King has a tremendous record of weakening US assets whenever he gets in front of a lectern or microphone. He testifies to the Treasury Select Committee at 09.45 on the state of the economy and we would expect the rot to start there. We also have US Durable Goods Orders at 13.30 with a 1% increase expected which should strengthen the greenback.