Without a doubt, the most important currency to be watching this week will be sterling. The big story in the UK is the persistently high level of inflation which has been well in excess of the MPC's 2.0% target and indeed the 3.0% threshold set by the Treasury throughout 2010. For much of the year, this surge has been disregarded or overshadowed by the BoE's unwavering focus on vulnerable growth and an inflation forecast that predicts a rapid decline in inflation at some point.

But this story has really started to get interesting since MPC member Sentence began dissenting at the BoE meetings in favour of a rate hike, and more commentators have started to speculate on whether the BoE's inflation forecast may be wrong and a hike is actually on the cards a lot sooner than we've been led to believe.
  
For these reasons, on Tuesday all eyes should be on the June reading of UK CPI; where consensus is looking for the year-on-year figure to pare back to 3.1% from last month's 3.2% print. But expect a strong bout of GBP demand if the reading should deviate higher. On Wednesday, we get the release of the BoE minutes from the most recent meeting. Recall there were no changes to monetary policy announced this month but if it's revealed that any other members have joined Sentence in voting for a hike then we expect GBP to rally pretty sharply. In fact, we feel that such a scenario would be a game changer for the GBP and would consequently be looking for another test of the 1.6000 barrier in the near term and then perhaps another trip to the 2010 highs around 1.6450.  

Given the prevailing uncertainty within the Eurozone, we actually like trading GBP strength through EURGBP - thus stripping out a lot of the USD-volatility that's made trading so tricky for retail investors of late whilst also expressing our bias for softness in EURUSD going forward. Looking at the technicals, we believe that once we're below 0.8200 ion EURGBP there's a clear route to the 29 Jun lows around 0.8070.  
Forex-Chart

Today's Key Issues (time in GMT):
09:00 EUR CPI (Jul); exp: -0.4% MoM, 1.7% YoY, prev: 0.0%, 1.4%
12:30 USD Empire Manfacturing (Aug); exp: 8.30, prev: 5.08