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The market is currently looking for the year-over-year CPI to stay at last month's level of 4.5%. However, core CPI, which excludes food and energy, is expected to fall marginally to a year-over-year change of 3.5% from last month's reading of 3.7%. Paradoxically, a decline in the rate of inflation may actually be bad news for the pound, as many believe that this would give the central bank an excuse to keep its low interest rate policy for a longer period of time. However, considering that a number of other central banks have either hinted at hiking rates or have actually gone through with a rate increase, including the eurozone, even a modest uptick in inflation could force the bank to act before the year is out, even though the rate of growth in the British economy is still pretty weak. "If inflation is higher, we're likely to see sterling gain but it will probably be short-lived," said Lee McDarby, head of dealing for corporate and institutional treasury at Investec. "The market needs to see a sustained uptick in data before there is any real talk of interest rates rising.” [British Pound ETFs: The Real Danger]
Thanks to this key announcement, investors should look for the Rydex CurrencyShares British Pound Sterling Trust (NYSE: FXB ) to be in focus throughout today's session. The fund tracks the GBP/USD exchange rate, measuring the relative value of the pound against the greenback. Thanks to some level of dollar weakness, FXB has managed to rise so far in 2011 by just under 4.1%. However, the pound hasn't been too strong as of late, sinking by close to 1.6% in the past two weeks alone. Should inflation come in above expectations, it could actually boost FXB as it will probably force the BOE to raise rates sooner than later. If, however, CPI looks to moderate, it could give the central bank more time to keep its easy money policies in place, potentially boosting the economy but sinking FXB, at least in the short run [see more charts of FXB here].
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