MAY 14 UK Jobless Claims Change (APR) (8:30 GMT; 4:30 EDT)
Expected: 0.0k
Previous: -1.2k

BOE Quarterly Inflation Report (9:30 GMT; 5:30 EDT)
Expected: Hawkish
Previous: Hawkish

What Are The Markets Facing?

The release of UK jobless claims at 4:30 EDT tends to spark a decent amount of price action for the UK markets, and with declines in the number of people claiming unemployment benefits forecasted to stall, the news could be quite bearish. However, the comments within Bank of England’s Quarterly Inflation Report at 5:30 EDT may override any shift in sentiment from the jobless claims report, as it will serve as a critical and timelier view of the Monetary Policy Committee’s bias. When the Bank of England last released this report in February, they indicated a reduction in the bank’s growth forecast, but the underlying attitude suggested that future rate cuts may come at a more leisurely rate than the markets had been anticipating. Will we see a repeat this time around? Possibly. Given the surge in UK CPI to the 3.0 percent level, there will likely be a pronounced focus on the upside inflation risks and indications that CPI will probably rise even higher, prompting BOE Governor Mervyn King to write a letter to Chancellor of the Exchequer Alistair Darling explaining how he plans on bringing CPI back to the 2 percent target. The key to gauging the potential for future rate cuts will lay in the MPC’s view of the economy, as a more pessimistic view of the downside risks to growth could lead the markets to continue pricing in a 25bp cut in June. Nevertheless, with oil still trading at record highs above $126/bbl and broad inflation pressures mounting, there is a good chance the Bank of England will leave rates steady at 5.00 percent next month.

Bonds – Long Gilt Futures

Gilts continue to trade within a rising channel, but have backed off from trendline resistance near 109. Indeed, the contract plummeted for a test of 108 on Tuesday with the help of much stronger-than-expected UK CPI figures, and the upcoming BOE Inflation Report could be just as big of a market-mover for Gilts as it will give a timely view of the BOE’s monetary policy bias. If the report suggests the central bank holds a more hawkish bias given major upside inflation risks and the recent jump in CPI, Gilts could tumble toward the next level of support at 107.75, though a test of 107 would not be out of the question.

FX – GBP/USD

The GBP/USD pair has tumbled in a rather orderly fashion over the past month or so, holding within a well-defined falling channel. However, there are indications that the pair could be in for a bounce toward 1.9650. First, looking at the most recent COT report, the British pound has been at a bearish extreme for nearly an entire month as the 52 and 13 weeks indexes continue to hold at 0, suggesting a bottom is forming in the GBP/USD. Furthermore, according to Technical Strategist Jamie Saettele’s Daily Technical Report, “Over the last 2 months, the pair has gone sideways and it is more likely that this serves to build a bullish base that will lead to a rally through 2.04 in wave Y of a large W-X-Y complex correction…Also, very short term charts show that the rally from 1.9441 is impulsive.”

Looking ahead to Wednesday, the release of the Bank of England’s Quarterly Inflation Report presents substantial event risk for GBP/USD, as it may be one of the best gauges of the MPC’s bias ahead of their next meeting in June. Given the recent surge in UK CPI, it will not be surprising to see the BOE show a hawkish stance in their inflation report, and with the markets previously expecting a 25bp rate cut in June, the news could send GBP/USD surging higher. On the other hand, in the case the BOE focuses more on the downside risks to growth, GBP/USD could pull back toward 1.94.

Equities – FTSE 100

The FTSE 100 may be nearing the end of its consolidation within a rising wedge, which is likely to have bearish implications for the index. Furthermore, the Bank of England’s Quarterly Inflation Report on Wednesday presents heavy event risk for UK stock markets, as the news may skew expectations for the bank’s next rate decision in June. The markets are still betting on a 25bp cut to 4.75 percent, but if the report reflects a hawkish bias by the BOE, the news could trigger a sharp pull back below near-term support at the 200 SMA at 6,175 toward 6,000.

Terri Belkas is a Currency Strategist at FXCM.