UK Consumer Price Index (MoM) (JUN) (08:30 GMT; 04:30 ET)
Expected: 0.1%
Previous: 0.3%

UK Consumer Price Index (YoY) (JUN) (08:30 GMT; 04:30 ET)
Expected: 2.3%
Previous: 2.5%

How Will The Markets React?

The status of inflation in the UK has been of urgent concern to the Bank of England ever since CPI surged to 3.1 percent in March, which subsequently forced BOE Governor Mervyn King to write a letter to former-Chancellor of the Exchequer Gordon Brown explaining how he planned on bringing the inflation index back down to the 2.0 percent target. Since then, the central bank has maintained a highly aggressive stance on fighting a build up in price pressures by enacting two 25 basis point rate hikes in May and July. With UK interest rates now at a six year high, has the BOE done enough? Markets will get to gauge this on Tuesday when June CPI will be released. The figure is anticipated to slow to 0.1 percent growth during the month, and ease back to an annualized pace of 2.3 percent from 2.5 percent. This would be highly encouraging for the British monetary policy committee members, as a gradual move towards the central bank’s 2.0 percent target is just what they will be looking for. As far as the markets go, a reading that is actually softer than expected – especially if the annualized CPI rate falls below 2.0 percent - could lead traders to cut back heavily on expectations of a move to 6.00 percent in the near-term. On the other hand, signs that inflation remains hot with a stronger-than-estimated CPI report will only back up the BOE’s tightening bias and leave markets pricing in hawkish policy moves in the future.

Bonds –10-Year Long Gilt Futures

Gilts showed a strong bid tone on Monday with the help of support at 103.51. The next level of resistance looms above at 103.97, but with UK CPI expected to show that inflation pressures have eased, Gilts may make a push for 104.38 as markets will discount the potential for policy tightening by the BOE in the near term. However, if CPI is surprisingly hot, expect a plunge in Gilts as yields will surge in anticipation of a 6.00 percent benchmark rate.

FX – GBP/USD

The vicious ascent of GBPUSD has garnered a good amount of attention as the pair continues to hit fresh 26-year highs. Will 2.0400 mark the end of the steep uptrending channel? Currently, commercial interest in the British pound may signal a top for the currency, as our Technical Strategist Jamie Saettele mentioned in this week’s COT report. Furthermore, economic data out of the UK this week may only make this a self-fulfilling prophecy, as inflation pressures are anticipated to soften. CPI for the month of June is estimated to fall to 2.3 percent on an annual basis from 2.5 percent, while both retail sales for the month of June and GDP for the second quarter are predicted to ease, indicating that the Bank of England’s previous policy actions have started to make an impact and lessening the need for further rate hikes. As a result, the release of CPI on Tuesday could spark a precipitous plunge for GBPUSD with the next level of support near 2.0250. On the other hand, stronger-than-estimated inflation readings could keep the uptrend intact with 2.0500 serving as the next bullish target.

Equities – FTSE 100 Index

UK stocks fell for the first time in three days, leading the benchmark FTSE 100 index down 0.3 percent to 6,697.70 in London. A 6.9 percent drop to 3985 pence in shares of Lonmin Plc paced declines after the mining company said it will delay the sale of as much as 90,000 ounces of platinum. Meanwhile, a 0.7 percent plunge in the price of copper futures for September delivery to $3.5685 a pound in New York sent other miners lower. BHP Billiton, the world's largest mining company, dropped 1.2 percent to 1509 pence while Xstrata, the world's fourth-largest copper producer, slid 1.8 percent to 3361 pence. In other equity news, Vodafone Group Plc reversed earlier gains of 1.8 percent to end the day down 0.6 percent at 162.2 pence after the company denied a report by the Financial Times, which said the company may pursue a $160 billion takeover of US-based Verizon Communications Inc.

Speculation on the Bank of England’s next policy move will garner quite a bit of attention Tuesday morning, as CPI for the month of June is estimated to fall back towards the central bank’s 2.0 percent target. A decline in line with or below expectations could spark a rally in UK equities and lead the FTSE 100 to close above the 6,750.00 level, as traders will be betting that a rate hike by the BOE will not be in the cards in the near term. On the flip side, a stronger-than-estimated CPI report will only support the BOE’s hawkish bias and could send the UK benchmark equity index plummeting towards a supporting trendline near 6,600.00.

Terri Belkas is a Currency Strategist at FXCM.