Inflation data from the Eurozone forms the headline data release for foreign exchange markets at the start of the week as it comes just a month out from the ECB's likely decision on the fate of its quantitative easing program.

Final CPI numbers showed headline inflation rising at a rate of 1.5% in August, according to the data, while core inflation held steady at 1.2%. The August data marks a notable turnaround from the year-ago situation, when headline inflation was just 0.3%.

The lowest inflation rates were seen in Ireland, Cyprus, Greece and Romania for the month, while the highest were in Lithuania, Estonia and Latvia.

Energy, services, food, alcohol and tobacco drove the bulk of the increase, having all been among the greatest contributors to the recovery of Eurozone inflation in recent months.

The Euro rose back above 1.1950 against the Dollar in response to the release, reversing earlier losses and marking an intraday gain of 0.05%.

The Euro extended gains over the Pound in the wake of the announcement, trading at 0.8818, up 0.42% on the session. This makes for a Pound-to-Euro rate of around 1.1337.

The data comes at the opening of a week where foreign exchange markets will remain dominated by central bank action, although the current week will see the Federal Reserve take centre stage in the wake of the Bank of England and European Central Bank.

It also comes one month out from the ECB’s October meeting, at which it is eagerly expected to announce a tapering off of its quantitative easing program.

While the bulk of the data the ECB will use to determine its next round of forecasts is already in, inflation developments leading up to the meeting could yet have an impact on sentiment among governing council members.

“There are two ways that we expect the ECB to make its taper more dovish,” Jennifer McKeown, chief European economist at Capital Economics. “First, it will continue to stress that its plans will change if the economic or inflation outlook deteriorates. And second, we see it strengthening its forward guidance on interest rates.”

Expectations of a more dovish ECB have been building in recent months as currency weakness in the UK and US, as well as a firming economic recovery in the Eurozone, have helped to push the Euro more than 14% higher against the Dollar and 7% higher against the Pound.

“Given upward pressure on the single currency, we now see the ECB tapering its asset purchases over nine months instead of six next year. We still expect it to announce the full programme in advance, which is arguably more hawkish than the step-by-step approach that markets seem to envisage. But it could limit any further rise in the euro by strengthening its forward guidance about interest rates.”

A stronger currency makes imported goods cheaper to buy for domestic consumers and thereby, reduces inflation, which is counter to what the European Central Bank has been trying to achieve.

In September, the bank raised its forecasts for Eurozone economic growth over the coming years but cut back its inflation forecasts, citing the strength of the common currency as a factor in the decision.