Yet another night of fresh 26-year highs for the pound as UK inflation gauges surprised to the upside with CPI core reading hitting 2.0%. With core CPI reaching its highest level in 10 years, the news will only serve to stiffen BoE’s already hawkish posture as UK monetary officials make every effort to contain persistent price pressures in the system.

Despite the fact that headline inflation actually declined this month, the jump in the RPI measure from 4.3% to 4.4% suggests that UK retail demand remains elevated. Therefore, unless UK consumption falls precipitously in the next few months, the BoE is very likely to push short term rates to 6% in order to diffuse further inflation expectations. Cable rallied strongly in the aftermath of the release and now stands within striking distance of the 2.0500 barrier as speculators continue to bet on additional tightening.

There were no such assumptions in the Euro-zone however, as tonight’s ZEW survey printed at 10.4 versus 19.2 forecast on increasing fears that a higher euro could begin to negatively impact growth in the export driven region. Unlike UK which is a predominantly service based economy, the Euro-zone continues to rely on the manufacturing sector for a significant portion of its growth, As such, higher currency exchange rates may impact the EZ far more negatively than UK.

The EURUSD traded down to 1.3760 in reaction to the release before bouncing back. Market player may be slowly coming to the conclusion that ECB will raise rates only once for the rest of this year. The euro could still make a run for the 1.400 barrier especially if US data continues to produce sub-par results, however as we noted yesterday the rally in the pair is looking increasingly tired and tonight’s disappointing ZEW reading, may be the first hint that the single currency is due for a much needed correction.

Boris Schlossberg is a Senior Currency Strategist at FXCM.