Will UK inflation increase pressure on Bank of England to raise interest rates?

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In the absence of any significant data, yesterday saw Sterling test the topside against the US Dollar above £/$ 1.64 and test the downside against the Euro just below £/€ 1.13, but both moves seemed to run out of gas quite quickly.

Sterling was able to gain against the US Dollar as the US Federal Reserve remain committed to ploughing ahead with quantitative easing. It is a different sterling story when buying or selling Euros. Sterling struggles to stay above £/€ 1.13 and that level may again come under pressure today, especially if today's UK data and surveys don't offer support to those arguing for higher interest rates in the UK. 

It seems that economists and investors are changing their minds with regards the timing of the first interest rate hike by the Bank of England which is having a detrimental effect on Sterling. Many felt the BoE would raise rates in May, but it seems that they won't hike rates until August as recent data and surveys indicate that the strength of the UK recovery in the first quarter of 2011 is likely to have been softer than expected.

Overnight, the UK BRC retail sales survey pointed to a sharp pull back in sales values in March (although part of that may be due to the late Easter this year), whilst the Royal Institute of Chartered Surveyors house price balance showed fewer surveyors reporting lower prices. This mixed bag is unlikely to alter market sentiment ahead of the UK data releases this morning. 

There will undoubtedly be a lot of focus on the UK CPI figures for March, with most expecting the headline rate to have stalled at 4.4% year on year. Also released at 09:30 is the UK February trade balance with a narrowing of the overall deficit. 

In the US the focus will be on March import prices which are expected to be up sharply by 2.1% month on month following 1.4% previously.