PPI Input (MoM) (JUN) (08:30 GMT; 04:30 EST)
Expected: 0.9%
Previous: 1.2%

PPI Output (MoM) (JUN) (08:30 GMT; 04:30 EST)
Expected: 0.3%
Previous: 0.4%

How Will The Markets React?

After the Bank of England raised interest rates to a six year high of 5.75 percent, the central bank also noted that “the balance of risks” to price stability still “lie to the upside,” leaving the door open to a move to 6.00 percent before year-end. However, inflation figures have been falling back steadily after peaking at 3.1 percent just a few months ago. Are there significant price pressures still waiting in the pipeline? Traders will get a gauge of this on Monday when the producer price index is released. Both the input and output results are anticipated to slow on a monthly basis, which will lessen the effects of an expected pick up in the annual rates of growth. PPI is usually released during the same week as CPI and traders tend to use the factory gate price report to handicap consumer prices. However, this time around, CPI will not be announced until the following week, so PPI may not garner as much attention and may only lead traders to forget the central bank’s bias. Nevertheless, a sharp, surprising pick up in the factory gate price report will only ramp up speculation of BOE tightening later in the year and could lead yields and the British pound higher.

Bonds – 10-Year Long-Gilt Futures

Intraday charts show that Gilts have retraced, bouncing off the new low at 102.90. However, daily technicals show more bearish price action, as 104.00 has contained any pushes higher and may signal that there is plenty of scope for further weakness. Looking ahead, Fibonacci support below the 103.00 level at 102.69 could be the next target, and a stronger than expected PPI report would only take it there faster. On the other hand, if PPI eases back in line with or below estimates, Gilts may move up towards 103.55 as traders write off the potential for Bank of England policy action in the near term.

FX – GBP/USD

The British pound made stealthy gains to break fresh 26-year highs above 2.0200 last week as the Bank of England raised interest rates to a six year high of 5.75 percent. The decision was widely expected after BOE Governor Mervyn King was overruled in a 5-4 vote in June, as the majority was in favor of leaving the benchmark steady. With CPI still above the central bank’s 2.0 percent target and house price growth accelerating, there was little doubt that King would be able to convince the other policy makers to take action this time around. Nevertheless, most of Cable’s gains were accrued before the actual rate announcement in the typical “buy the rumor, sell the news” we see so often in the forex market. GBPUSD bulls were not completely out of luck, however, after a bout of US dollar weakness helped push the pair back above 2.0100 as interest rate differentials are likely to remain in favor of the UK currency for at least the remainder of the year. This case is only furthered as the Bank of England maintained their hawkish stance after their rate hike, noting that “the balance of risks” to price stability still “lie to the upside,” leaving the door open to a move to 6.00 percent before year-end. The big question for traders is: will GBPUSD above 2.0000 become the norm? Moreover, how will this impact the UK economy?

The release of the UK trade balance this week may provide some clues as to the impact of a strong British pound, as the deficit is anticipated to widen further. The manufacturing sector is in the process of recovering, and a sharp slowdown in export demand on the back of a more expensive currency could really limit any further improvements. Regardless, until inflation growth starts to slow substantially, the Bank of England will remain aggressive in their policy stance, which will only support GBPUSD further. As a result, traders should look to the producer price index readings this week for a gauge of price pressures in the pipeline, as a marked decline may precipitate a Cable fallout down towards the 2.000/50 level once again.

Equities – FTSE 100 Index

UK stocks climbed on Friday, sending the FTSE 100 Index up 0.8 percent to 6690.10, led by oil companies as crude advanced to a 10-month high on concern unrest in Nigeria and maintenance of a North Sea oil field will curb supply as unexpected refinery closures cut fuel output. BP, Europe's second-largest oil company, gained 1.1 percent to 610.5 while Shell, the region's largest, added 2.9 percent to 2115. Meanwhile, BHP Billiton gained 3.7 percent to 1516 after Credit Suisse Group said that the world's largest mining company may expand its copper and nickel businesses in Latin America to meet Chinese demand.

Surprisingly, the Bank of England’s hawkish monetary policy stance has had little impact on the FTSE 100, as the 6,500 level has held up as decent support. However, 6,700 has proven to be difficult for the benchmark index to beat, and Monday’s release of the UK producer price index may not help. Though the monthly figures are anticipated to show a slowdown, the annual rates of growth are expected to pick up pace and signaling that price pressures in the pipeline persist. As a result, the Bank of England will only be more likely to maintain their tightening bias, which could help keep the FTSE 100 below 6,700.

Terri Belkas is a Currency Analyst for FXCM.