Business-Insider

Consumer Price Index (YoY) (MAY) (08:30 GMT; 04:30 EST)
Retail Price Index (YoY) (MAY) (08:30 GMT; 04:30 EST)
Expected: 2.6%
Expected: 4.3%
Previous: 2.8%
Previous: 4.5%

Only UK equity markets saw noticeable price action on Monday as the sell-off in 10-year Gilts and the British pound finally took a break. However, with market-moving data on tap on Tuesday, traders could be in for a wild day. UK inflation reports are anticipated to show that price pressures continued to ease back during the month of May, with CPI estimated to hit 2.6 percent and RPI forecasted to slip to 4.3 percent.

Nevertheless, even those figures are lofty, especially as the Bank of England's official inflation target is well below at 2.0 percent. Furthermore, BOE Governor Mervyn King recently expressed an even more hawkish tone during a speech given in Wales, in which he said that the BOE "may need to take further action" on inflation as expectations have "drifted up." As a result, CPI figures confirming King?s commentary will really ramp up speculation of a July hike by the central bank.

On the other hand, if inflation reports actually hit the tape at softer-than-expected levels, the BOE will be more likely to continue watching pricing and capacity data in order to assess whether policy tightening will be necessary in August.

FX - GBP/USD
On Tuesday, GBPUSD could be in for a bounce based on both technical and fundamental factors. Looking at the daily charts, last week?s plunge was stopped short at seven month trendline support and the 50.0% fib of 1.9183-2.0131 at 1.9657. Should GBPUSD hold up against support, price could bounce up towards 1.9775 with the help of strong economic data.

While inflation reports are anticipated to ease back, CPI and PPI are also projected to remain elevated and could underpin the case for a July or August hike, depending on how strong price pressures remain, especially after BOE Governor Mervyn King said that the central bank "may need to take further action" on inflation. On the other hand, if we see that CPI falls closer to the 2.0 percent target than markets are expecting, GBPUSD could break down through support to target 1.9500.

There are other major UK releases due out this week, and on Wednesday, signs of further tightening in the labor market will feed into concerns of mounting wage pressures. Furthermore, Retail Sales are forecasted to rebound on Friday, signaling that consumption remains healthy despite higher interest rates. However, with BRC Retail Sales for the same month indicating a sharp slowdown, there are major downside risks for this particular release. Nevertheless, should speculation about the BOE's future policy action remain the dominant theme in British pound trade, GBPUSD gains may resume.


Analysis by DailyFX