The UK’s inflation data for June is due for release at 0200 US Eastern Time (0600 GMT). The Consumer Price Index (CPI) data is anticipated to remain steady, providing insight into the nation’s inflation trends.
Nathanaël Benjamin, the Bank of England’s Executive Director of Financial Stability Strategy, will deliver a speech. This event, at the OMFIF Economic and Monetary Policy Institute, is titled ‘Getting Liquidity where it is needed’.
Uk Inflation Data
We are closely watching the upcoming UK inflation data, as the market is positioned for a significant move. While the headline consumer price index is expected to fall to 8.2% from 8.7%, we see the real test in the core inflation figure, which is forecast to remain stubbornly high at 7.1%. A deviation from these numbers will be the primary catalyst for market activity.
If the data comes in hotter than anticipated, it will reinforce the market’s current pricing of a peak Bank of England interest rate above 6% and likely lock in a 50-basis-point hike in August. This scenario would pressure UK government bond prices and could see a surge in demand for options that protect against a fall in the FTSE 100. Historically, the May inflation report, which showed an unexpected rise in core prices, led to a sharp sell-off in gilts.
A softer inflation print would present a greater shock to the system, forcing a rapid unwinding of the aggressive rate hike bets currently embedded in SONIA futures. Such a downside surprise would likely trigger a rally in short-term government bonds as traders re-evaluate the central bank’s path. We would position for falling yields in this case.
Mr Benjamins Speech
The speech from Mr. Benjamin will be viewed through the lens of financial stability, not monetary policy. We will be listening for any commentary on the health of the UK banking sector or market plumbing, as this could impact the cost of leverage for derivative positions. Any new concerns about getting liquidity into the system could signal underlying stress.
