A very high UK CPI release on Tuesday would provide some near-term Sterling support on speculation that the BOE would be forced to respond.
Sterling remained under pressure against the dollar during Friday and weakened to lows around 1.9410 before pushing back towards the 1.95 level later in US trading as support levels held. The UK currency strengthened against the Euro, but there was evidence of further selling at levels stronger than 0.7880 which curbed gains.
The UK inflation data will be watched closely this week and there were hints from the Treasury that it is expecting a letter to be received from the Bank of England which suggests that the rate will be above the 3.0% level.
This should come as no surprise given the recent upward pressure on prices. A very strong inflation reading would, however, increase speculation that the Bank of England could be forced to increase interest rates which could provide some Sterling support even with sentiment still undermined by fears over the economy.
The latest BOE quarterly bulletin warned that higher inflation may persist in the medium term and the UK currency was slightly stronger on Monday on yield considerations. Subsequent dollar weakness pushed the UK currency to a peak around 1.96 against the US currency