FOREX UPDATE - GBP

UK August inflation has come in firmer than expected, with CPI reported rising at a 2.5% y/y rate vs. consensus expectations for an unchanged 2.4% rate.
The result has pushed the short sterling curve higher, with the March '07 implied yield rising 6 bp.
The curve is now pricing risk of two rate hikes by year-end, one more than we think is likely, and EURGBP has sold off sharply back below 0.68. We continue to target the cross at 0.6750 on a 1-month basis but would be cautious about looking for further downside, particularly with ECB expectations continuing to grind higher on quite hawkish comments from Board Member Garganas, who called current monetary conditions still very accommodative.