There was very little movement yesterday in FX markets as everyone seemed to take a breather from the exertions of the past week and leave currencies alone. The G8 meeting in Chicago finished without any real news from the participants; Francois Hollande continued to dredge up past ideas to present to Germany (Eurobonds seemingly the new favourite) although these have already been rejected by Merkel. You can’t but like the new French President for his awkwardness.

The focus today will most definitely be on the pound and the prospects for the UK economy. Inflation has been the bugbear of the Bank of England since the crisis started in 2008. Since then, it has consistently traded above target with wage increases only averaging around 1%. British people have got a lot poorer in real terms in the past few years as price increases have eaten away at their living standards.

Some good news may be due today however in the form of CPI data that is expected to show a drop back to 3.1%, a near 2 year low. This is on the back of a substantial shift lower in the price of a barrel of oil in sterling that has been helped by firstly, the decrease in the price of a barrel of oil but also the strength of sterling in the past few weeks.

Of course, the slip in CPI will give those people who believe that further QE is needed to keep the UK economy going, more room to manoeuvre. This is ahead of tomorrow’s publication of the minutes from the latest Bank of England meeting that we expect to show only saw one vote for QE.

In all likelihood, this could be the week for sterling that sees it sit lower against the euro especially if today’s inflation number is around expectation and Thursday’s GDP numbers emphasise that the UK is still in recession. Tomorrow’s retail sales numbers are also forecast to be quite heavily negative.

Elsewhere, EURUSD has started to squeeze those who were forecasting it to drop off the map any time soon and we think that this continues. This move will also help GBPUSD back towards 1.60 but at a much slower rate.

Apart from the UK data, we have two very short-term auctions from the Spanish (3 and 6 month bills) while the European Financial Stability Facility auctions 6 month debt also.

Latest exchange rates at time of writing