Sterling will be closely watching the inflation data today. Last month saw a sharp rise in the headline rate to 1.9%, which was in part owing to the different timing of sales vs. last year. As such, there are expectations for the rate to move lower to 1.8%, with the spread of forecasts from banks and others is skewed towards the downside from this level. The pricing in markets suggests around a 30% chance of a rate hike from the Bank of England by November. The significance of today’s numbers has perhaps diminished a little after the Inflation Report, but the market will still be sensitive to a firmer number. Sterling has been somewhat beaten up by the perceived mixed signals coming from the Bank of England over the past few months and we’ll get more on that tomorrow with the release of MPC minutes for the August meeting. This is perhaps the bigger risk event for sterling this week with low probability but high impact if any member is seen straying and voting for higher interest rates.
Staying with central banks, the minutes to the August RBA meeting reflected continued uncertainty on the domestic economy, but the tone was not sufficiently bearish to push the Aussie significantly lower. Note that RBA Governor Stevens speaks tomorrow, giving his half-yearly testimony before the Australian parliament. This could be worth keeping a close eye on, given that the past year he has proven to be fairly vocal on the currency from time to time and we are still more than 4% above the level (December last year) where he was still talking it down. Note that US inflation is also seen today, the headline rate seen softer to 2.0% (from 2.1%), but this is not likely to be a game changer for the dollar, which has fallen back into a range after the bullishness seen in July.