UK PPI Input (YoY) (OCT) (09:30 GMT; 04:30 EST)
Expected: 7.2%
Previous: 6.4%

UK PPI Output (YoY) (OCT) (09:30 GMT; 04:30 EST)
Expected: 3.3%
Previous: 2.7%

How Will The Markets React?

With oil and other commodity prices rocketing to record highs, there are well-warranted concerns that global inflation will rise significantly. The prospect of increased price pressures only compounds the problems that the Bank of England already faces as they contend with mounting downside risks to growth and uncertainty surrounding the ongoing reappraisal of risk in the financial markets. Indeed, Bank of England Governor Mervyn King has taken quite a bit of flak following the run on Northern Rock in September, as critics say that he failed to help the situation when he refused to provide extra liquidity amidst the rapid tightening of the credit markets and hasn't accepted enough blame for the event. In fact, King – an ardent inflation hawk that is strongly against increasing the risk of moral hazard – left the UK’s benchmark lending rate steady at 5.75 percent for the fourth consecutive month on November 8, as more accommodative monetary policy would only fan price pressures. This topic may come to the forefront yet again on Monday as UK input and output costs are forecasted to rise at the sharpest rates in over a year. Indeed, PPI input is expected to surge 7.2 percent from a year ago while PPI output is predicted to gain 3.3 percent from a year ago. The data not only suggests that broad price pressures are mounting, but also that companies are feeling the squeeze on their profit margins as they are unable to pass through the increased costs to their customers. Furthermore, the news will set the stage for the release of CPI on Tuesday, which is anticipated to show that consumer price growth edged closer to the Bank of England’s 2.0 percent target, which should continue to prevent the central bank from cutting rates in the near-term.

Bonds – 10-Year Long Gilt Futures

Gilts rallied to test the 108.83 contract high on Friday, and though the contracts have pause at resistance, a break above 109 is likely to target 109.34. However, Monday’s event risk could weigh on Gilts to push them down towards 108.09 as PPI data is anticipated to show that inflation pressures are building in the UK, which should prevent the Bank of England from even considering cutting rates in the near-term.

FX – GBP/USD

Broad-based weakness in the greenback has allowed GBP/USD to tear higher, with fresh 26-year highs being accomplished daily. Recently, comments from a Chinese official suggesting that the government would diversify their $1.4 trillion in FX reserves away from US dollar allowed GBP/USD to break above 2.10. While deteriorating economic conditions in the UK may not warrant such a strong bid for the British pound, Monday’s release of the UK producer price index may bring the inflation issue to the forefront once again. Indeed, with upside inflation risks mounting, the Bank of England has already been prevented from cutting rates despite instability in the financial markets because of their price stability mandate. Both PPI input and output are expected to rise at their fastest pace in over a year, and the news could lead GBP/USD to push towards resistance at 2.1150, with sharp rallies targeting 2.1246. However, if the figures actually prove to be much weaker than expected, the pair could finally start to sell off a bit.

Equities – FTSE 100 Index

The FTSE 100 failed to push through resistance at the confluence of the 100- and 200-SMAs at 6,426/35 on Friday, indicating that equities are lacking bullish momentum. Nevertheless, the index stopped short of falling through the 50 percent Fibonacci retracement level of 5,821.7 – 6,751.7 at 6,290, which could leave the FTSE to range trade in coming days. However, produce price inflation data could set the FTSE up to fall further, as the figures may suggest that the Bank of England will not cut rates in the near term due to increased price pressures. As a result, the index could take on the 61.8 percent retracement level at 6,176.

Terri Belkas is a Currency Strategist at FXCM.