Sterling’s rise against the dollar stalls following disappointing economic data, says foreign exchange broker Caxton FX.

After the heady 10 per cent gains of May, sterling's rise against the euro and the dollar has stalled this month and suffered a short, sharp setback this week, following some disappointing economic data.

The pound peaked this month at $1.66 and €1.18 but has retreated this week to as low as $1.61 and €1.16 with the main falls on Wednesday and Thursday.

This was the most important week of the month for UK economic news. Inflation came in higher than expected showing deflation fears have probably been overdone but unemployment jumped to 2.26 million, its highest level in 12 years.

The biggest disappointment of the week, though, was the unexpected drop in retail sales after three months of rises. In addition, markets were also making heavy weather as the recent commodity rally ran out of steam, and equities, weighed down by new rights issues, also retreated.

Alex Dunn, senior trader at Caxton FX, says, ‘Economic recovery is under way but the recent data suggests that it looks quite weak at this stage. Growth, even if it turns positive in the second half of the year, may not be enough to stop unemployment rising into 2010. We think that investors are taking a pause for breath as they register that the recovery will be slow and gradual rather than a swift bounce-back.

‘Notwithstanding this setback, we believe that the case for further strengthening of the pound remains intact in the medium term, as investors' appetite for risk improves and the financial crisis recedes.’