UK Headline CPI (YoY) (MAR) (08:30 GMT; 04:30 EDT)
Expected: 2.6%
Previous: 2.5%

Core CPI (YoY) (MAR) (08:30 GMT; 04:30 EDT)
Expected: 1.3%
Previous: 1.2%

What Are the Markets Facing?

On Tuesday, UK CPI figures are anticipated to show stronger inflation pressures, with the index expected to rise 0.6 percent in March from the month prior and 2.6 percent from a year earlier. If anything, there are significant upside risks for this particular release, as UK PPI showed prices accelerating at the fastest pace since 1991. While the bulk of these price gains are the result of surging commodities like oil and food, even the core CPI measure is anticipated to pick up slightly. The Bank of England cut rates as recently as April 10 by a quarter point to 5.00 percent, and while there were likely Monetary Policy Committee members that voted for a 50bp cut in light of the ultra-tight credit market conditions and housing slump, inflation remains of major concern. Indeed, the MPC noted that, “(o)n the upside, above-target inflation this year could raise inflation expectations so that, in the absence of some margin of spare capacity, inflation would remain above the target.” As a result, very strong UK CPI figures could lead the markets to cut back expectations for policy action in May. Nevertheless, the MPC also noted that “the disruption in financial markets could lead to a slowdown in the economy that was sufficiently sharp to pull inflation below the target.” With instability in the markets likely to remain an issue in coming months, the odds are ultimately greatly in favor of at least a 25bp rate cut in May, regardless of how this CPI release fares.

Bonds – Long Gilt Futures

Gilts have bounced off the recent lows from oversold levels, but have run into resistance near 111. However, upcoming UK CPI data could weigh the contract back down to 110 as the news may suggest building price pressures in the economy. On the other hand, if the data proves to be softer-than-expected, traders will ramp up speculation of additional rate cuts by the Bank of England, which could propel Gilts above 111 toward 111.45.

FX – GBP/USD

The GBP/USD pair continues to consolidate within a falling wedge, which tends to result in a bullish breakout. However, GBP/USD has thus far had difficulty pushing above resistance at the confluence of the 50 percent fib of 1.9361 – 2.0397 and 100 SMA at 1.9880/96. Upcoming UK economic may help send the pair higher for another test of resistance, as inflation pressures are forecasted to strengthen. While it may not be enough to prevent the Bank of England from cutting rates further in coming months, the news could lead traders to cut back expectations for more aggressive reductions. On the other hand, surprisingly soft CPI figures could weigh on GBP/USD, with a break below near-term support at 1.9740 targeting 1.9650, while sharper declines may ultimately take on 1.9500.

Equities – FTSE 100 Index

The FTSE 100 has continued to fall since running into heavy resistance at the psychologically important 6,000 level and the 100 SMA. Indeed, risk aversion trends remain the primary driver of equity market activity, and the start of Q1 earnings season has not helped the case for indexes like the FTSE 100 and DJIA. Looking ahead, upcoming UK CPI data will not bode well for the FTSE 100, as the combination of slowing economic growth and mounting inflation pressures

Terri Belkas is a Currency Strategist at FXCM.