UK Headline CPI (YoY) (OCT) (09:30 GMT; 04:30 EST)
Expected: 1.9%
Previous: 1.8%

UK Core CPI (YoY) (OCT) (09:30 GMT; 04:30 EST)
Expected: 1.7%
Previous: 1.5%

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 Tuesday as the consumer price index is anticipated to rise closer to the Bank of England’s 2.0 percent target, suggesting that broad price pressures are mounting and preventing the central bank from cutting rates in the near-term. Indeed, Monday’s PPI figures were stronger than expected on a combination of hot petroleum product and food prices, which raises the probabilities that the headline consumer price index reading will be surprisingly strong as well. If this happens to be the case, fixed income markets may prove to be the most responsive, as FX and equity markets remain driven by risk aversion flows.

Bonds – 10-Year Long Gilt Futures

Gilts have become a bit more defensive below the 109.00 level, but there are no signs bulls have lost control of the contract. Daily charts show that Gilts remain fairly strong, and a break above 109.00 target resistance at 109.34. Today’s US holiday limits immediate upside potential, and Tuesday’s UK CPI release may not help Gilts either, as the data is likely to signal that the Bank of England will not be able to cut rates in the near-term. Support looms below at 108.50, and a break of that level targets 108.32.

FX – GBP/USD

Since GBP/USD ran into resistance at 2.1162 on Friday, the unwind in the pair has been similar to that of many other carry trades. Interest rates in the UK are nothing to scoff at – at a solid 5.75 percent, interest rate differentials work out to be a full 175bp versus the Euro and 125bp versus the greenback – so it’s no wonder that the risk aversion flows we’ve seen market wide have taken a toll on Cable as well. Monday’s UK PPI data did little to provide a bid for the British pound, despite the fact the figures were stronger than expected. Will Tuesday’s UK CPI release prove to be a bit more market-moving? Unless the headline or core annualized reading jumps above the Bank of England’s 2.0 percent target, the news isn’t likely to play a large role in Cable trade. While signs that mounting price pressures will increase speculation that the central bank will not be able to cut rates in the near-term – which is usually supportive of Cable – the carry-driven sentiment in the GBP/USD pair is a bit overpowering right now so traders should keep an eye on the status of the equity markets and other FX carry trades like GBP/JPY. If the markets remain risk averse, a break below 2.07 may target Fibonacci support at 2.0590. However, a bounce higher may rally to cover the slight gap on the daily charts near 2.0870/80.

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, consumer price inflation data on Tuesday 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.

Terri Belkas is a Currency Strategist at FXCM.