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Inflation bites, time for a rate hike muzzle?

Inflation bites, time for a rate hike muzzle?

GBP 
Sterling carried on its losing streak for the second consecutive day yesterday after Britain’s construction sector showed growth slowing in June, adding to signs that the economy might be struggling to gain momentum after a slow start to the year.

The Pound, which at the start of the week was trading less than half a cent away from nine-month highs due to bets the Bank of England (BoE) could raise interest rates by the end of the year, dipped to a six-day low of after the data was released.

The BoE is close to raising interest rates for the first time in a decade. It is watching for signs that other areas of growth can offset a consumer spending slowdown, which is caused by a rise in inflation and a slowing in pay growth. One of the BoE’s interest rate-setters, Gertjan Vlieghe, said late on Monday he favoured keeping borrowing costs at their historic lows, despite a shift among some of his peers at the central bank in favour of the first hike in a decade.

EUR

Eurozone producer prices fell 0.4% for May; more than expected, but the impact was limited as potential monetary policy developments are the current market focus.

European Central Bank (ECB) Chief Economist Peter Praet stated that the ECB’s mission is not yet completed and that the baseline for future inflation remains contingent on very easy financing conditions. According to Praet, underlying inflation remains subdued, although higher expected returns on investment would reinforce policy accommodation. Overall, the ECB is expected to be very cautious in tightening monetary policy.

The Euro consolidated just below the 1.1350 level by late afternoon, with expectations of tapering of bond purchases providing net Euro support on dips.

USD

US markets were closed for the Independence Day bank holiday yesterday. Trading conditions are likely to be subdued ahead of the Fed minutes with markets looking for further guidance surrounding interest rates and a potential start to shrinking of the balance sheet later this year.

Data To Watch:
8:00am EUR Non-Monetary Policy ECB Meeting
9:00am Markit Services PMI (Jun), Markit PMI Composite (Jun)
3:00pm USD Factory Orders (MoM) (May)
7:00pm USD FOMC Minutes

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