The US House Prices fell by 0.2% for the quarter which was less than expectations.  This gave the US dollar a boost.  Also, there is a rumor of a report from a private service that the BOE would consider a rate rise at the next meeting to stave off inflationary pressures.  This is supporting the GBP and GBPJPY in particular. 

Governor of the BOE, Mervyn King, has to write a formal letter to the Chancellor of the Exchequer if the target inflation rate rises above the 3.0% upper band explaining what measures are being taken to rein in inflation.  Last month, the CPI came in at 3.0%.  However, the expectation given the anecdotal evidence, and the fact that oil is above $130 per gallon, is that the rate will easily surpass the 3.0% level next month and in coming months.    As a result, the report about a hike is not be far from the truth. 

Ultimately, the tighter monetary policy will slow the economy and with it, the inflation level.  However, since inflation is now becoming a more global problem rather than centralized to a particular economy, the UK, and all countriies who suffer from the same dynamics, are subject to the same energy issue.  Global demand for energy needs to slow since this is driving the inflation (or if it is a bubble, the bubble must burst).  If that does not happen soon, the one thing the central banks can try to stop is the inflation caused by the higher energy inflation.  If ex energy inflation starts to rise, that would be a concern.

Last month, the UK Core inflation rose for the first time in 7 months when it went from 1.2% to 1.4%.  Although the core rate is in the middle of the longer term range of late, the risk is that as the month on month inflation pressures build, the dam may break and prices to the consumer for goods other than energy, will start to rise as well.  This is the dilemma the central bankers, like Mervyn King, need to wrestle with and which some will need to explain to their boss.  How do you tell the government officials inflation will come down, when the price evidence says otherwise?   That's a tough one.