The British pound circled near month-long lows in early European trading today following weaker than expected CPI numbers which printed at -0.5% versus -0.4% projected with year on year inflation at 1.9% just below the BOE target of 2.0%. The unit immediately fell in the aftermath of the release as traders bet that BOE will have to finally relent and drop rates another 25bp at the next MPC meeting in March. However, some analysts predicted that the Central Bank will stay pat, still fearful of second round effects from higher oil prices.  In reality it isn't the inflation results but rather the unemployment data that will spur the BOE to act.  With oil prices off their highs and in danger of falling through the $60 handle the true concern of the UK Central Bank is not inflation but the fear that the UK economic growth may have hit a wall.  To that end this Thursday's UK unemployment figures may be far more indicative of future rate policy than tonight's CPI numbers. Furthermore as we noted in our weekly piece, "sterling is now at interest rate parity to the dollar and will soon slip to a negative carry. Once those costs begins to appear on specs daily report sheets the pressure to liquidate pound longs could accelerate."  

The euro meanwhile  continued to tread water as the pair has traded 20 points either side of the 1.1900 figure for more than 24 hours and traders ignored most of the eco data ahead of Bernake's testimony this Wednesday. Overnight the ZEW survey printed a tad lower at 69.8 versus 71 but the take away from the release by the market was that the reading remained at high enough levels to assure that ECB will hike rates at the upcoming March meeting.  On the US side the Retail Sales number will be the next event risk on deck. If it prints as expected,  the data would indicate that the consumer sector remains healthy and dollar bulls could be bolstered by the news.

Boris Schlossberg is a Senior Currency Strategist at FXCM.