• UK May CPI +8.7% vs 8.4% y/y expected
• Hot UK inflation continues to vindicate higher BOE rates
• Pound spike on inflation data fairly short-lived
• ECB’s Kazimir: Further policy tightening in September is not certain
• BOJ’s Ueda: Will patiently maintain easy monetary policy to achieve 2% inflation target
• BOJ’s Adachi: If there is a global recession, will have to keep easy policy
• Ifo sees German recession to be sharper than expected
• UK June CBI trends total orders -15 vs -17 expected
• US MBA mortgage applications w.e. 16 June +0.5% vs +7.2% prior

Markets:

• CAD leads, AUD lags on the day
• European equities lower; S&P 500 futures down 0.1%
• US 10-year yields up 2.9 bps to 3,753%
• Gold down 0.1% to $1,934.10
• WTI crude flat at $71.21
• Bitcoin up 2.8% to $28,966

The BOE would probably wish that their policy decision this month came a week earlier, as they now look further behind the curve in trying to address the inflation problem in the UK.

Headline annual inflation for the month of May was unchanged to April but core annual inflation continues to run higher. That is posing serious questions on the risk of stagflation in the UK, as monetary policy tightening is failing to have any effect it would seem.

A 25 bps rate hike was already well priced in coming into today but now traders are looking for at least a 50 bps move either tomorrow or in August, with nearly 75 bps worth of rate hikes priced in by then.

The pound caught a brief jump on the data, with GBP/USD moving up from 1.2765 to 1.2802 before quickly giving that back and then some after. The pair fell back to just below 1.2700 at the lows before keeping around 1.2720-30 at the moment. I touched more on the move in this post here.

The hotter UK inflation data kept bond yields underpinned during the session but the advance in Treasury yields is not too striking. At one point, yields even turned back flat in European morning trade. I reckon that speaks to the risk rotation we have been seeing so far this week, as equities also continue to stay more sluggish.

Again, month-end and quarter-end flows are a consideration in this regard. So, there’s that to think about when looking at the market moves this week.

In FX, the dollar remains somewhat steady as there is a lack of appetite among other major currencies today. USD/JPY did move a little higher to briefly hold above 142.00 but is now sitting back at 141.80 – just up by 0.3% on the day.

Let’s see what Powell has to offer next but as mentioned earlier, I won’t be holding my breath for any major remarks – not when it is just a testimony to Congress and it coming a week after the FOMC meeting.

This article was written by Justin Low at www.forexlive.com.