High CPI data on Tuesday would reinforce the major policy difficulties faced by the Bank of England.

Sterling was trapped below the 1.95 level against the dollar in early Europe on Monday ahead of the UK data.

Producer prices continued to rise strongly in April with input prices rising 2.4% over the month with an annual increase of 23.3% which was the highest increase for over 20years as energy and food prices continued to rise.

There was also a stronger than expected monthly increase of 1.4% for output prices and, crucially, the core increase of 1.0% for the month was sharply higher than in recent months. This increase will increase fears that inflationary pressure is building within the economy which will make it more difficult for the Bank of England to cut interest rates. The data triggered sharp initial Sterling gains and will tend to provide short-term support to the currency even though the longer-term implications would be negative.

The consumer inflation rends will remain under close scrutiny on Tuesday and will trigger further volatility.