What Happens If Tuesday's U.K. CPI Is Over 3%

The British pound was hands down the best performing currency today as it rose against the US dollar, Euro and Japanese Yen. This was partially due to dollar weakness and the expectation that tomorrow’s consumer price figures will be hot.

Like the rest of the world, the UK has not been immune to the sharp rise in crude, but one unique problem that Bank of England Governor King faces that his peers do not is the need to publicly explain himself. Consumer prices are currently at 3 percent and if it rises any higher than that, King will be forced to submit a letter to Chancellor Alistair Darling explaining why inflation has increased more than 1 percent above their 2 percent target, and how he plans to bring inflation down. He is also required to give a timeline on when he plans on achieving this - and that may include an interest rate hike.

This will be only the second time ever that the central bank governor has written this letter of explanation to the Chancellor since the BoE was granted independence in 1997. Interestingly enough, the last letter was also written by Mervyn King, to then-Chancellor Governor Brown (click here for the 2007 letter).

Therefore expect this to be a big week for the British pound.