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USD: Headline CPI inflation is seeing rising to 1.6% (from 1.4%) on the annual measure, with the core rate seen dropping from 1.7% to 1.6%.   A stronger reading would be taken as dollar positive.  More:  Falling inflation could push QE tapering towards late 2013

GBP: Inflation data is seen rising to 3.0% (from 2.7%). A higher number could struggle to be sterling positive given that the new governor has already hinted that rates are going nowhere for some time to come.

Idea of the Day

Keep a close eye on sterling today.   As we know, the new Bank of England governor made a dramatic entrance with the market moving statement from the first policy meeting earlier this month, essentially saying markets had got it wrong in pricing in the possibility of tighter policy next year. Today we have inflation data and if this moves above the top of the 1% to 3% band, then the new governor has to write an open letter to the Chancellor to explain why and what the Bank intends to do about it.

The market looks for headline inflation to move from 2.7% to 3.0% (which would not trigger a letter), but if it is higher, then this will be one of the most scrutinised letters of the year.   Sterling itself has been underperforming since Carney took office, largely thanks to his bombshell statement after this month’s policy meeting.   If inflation is higher than expected, then don’t expect the currency to gain (on reduced expectations of further QE) initially, as a further bombshell will be feared from the exchange of letters.

Latest FX News

AUD: The Aussie moving up 60 pips initially to the 0.9170 area overnight after the release of the minutes to the early July RBA meeting. The board viewed the inflation outlook as being slightly higher after the recent drop in the Aussie.   During July, AUDUSD has moved into a more consolidative phase, holding mostly with the 0.90 to 0.92 area. Further:  Forex Analysis: AUD/USD Bias towards Lower Lows

JPY:  Largely waiting for the upper house elections taking place this weekend.   The further rise in the stock market is providing some support for a more sustained move above the 100 level on USDJPY, but for the moment the yen is hanging just below.

USD: Recovering only slowing from the pummelling received last week after comments from the Fed Chairman and minutes to the latest FOMC meeting.   Focus is on Bernanke’s key semi-annual testimony which takes place tomorrow.