By DailyFX – Only UK equity markets saw noticeable price action on Monday as the sell-off in 10-year Gilts and the British pound finally took… … a break.

However, with market-moving data on tap on Tuesday, traders could be in
for a wild day. UK inflation reports are anticipated to show that price
pressures continued to ease back during the month of May, with CPI
estimated to hit 2.6 percent and RPI forecasted to slip to 4.3 percent.
Nevertheless, even those figures are lofty, especially as the Bank of
Englands official inflation target is well below at 2.0 percent.
Furthermore, BOE Governor Mervyn King recently expressed an even more
hawkish tone during a speech given in Wales, in which he said that the
BOE may need to take further action on inflation as expectations have
drifted up. As a result, CPI figures confirming Kings commentary
will really ramp up speculation of a July hike by the central bank. On
the other hand, if inflation reports actually hit the tape at
softer-than-expected levels, the BOE will be more likely to continue
watching pricing and capacity data in order to assess whether policy
tightening will be necessary in August.

Bonds – 10-Year Long Gilt Futures

Gilt futures edged higher today, showing a mild recovery from the steep
drops weve seen over the past few weeks. However, with the Bank of
England widely perceived as maintaining a hawkish stance, Gilt bulls
have been reluctant to extend the bounce and there is still a long way
to go before this is anything more than just a brief correction. On the
intraday charts, the 50.0% fib of 104.08 104.65 at 104.36 has served
as decent support, with Long Gilt Futures wrapping up the session at
104.45. However, given the tightening bias of the BOE, the release of UK
inflation data could reignite the steep descent if CPI remains elevated.
On the other hand, if markets find that price pressures have let up more
than anticipated, Gilts could make a stealthy advance towards 105.00, as
yields would be inclined to plummet on the drop in rate hike
expectations.

FX – GBP/USD

On Tuesday, GBPUSD could be in for a bounce based on both technical and
fundamental factors. Looking at the daily charts, last weeks plunge was
stopped short at seven month trendline support and the 50.0% fib of
1.9183-2.0131 at 1.9657. Should GBPUSD hold up against support, price
could bounce up towards 1.9775 with the help of strong economic data.
While inflation reports are anticipated to ease back, CPI and PPI are
also projected to remain elevated and could underpin the case for a July
or August hike, depending on how strong price pressures remain,
especially after BOE Governor Mervyn King said that the central bank
may need to take further action on inflation. On the other hand, if
we see that CPI falls closer to the 2.0 percent target than markets are
expecting, GBPUSD could break down through support to target 1.9500.
There are other major UK releases due out this week, and on Wednesday,
signs of further tightening in the labor market will feed into concerns
of mounting wage pressures. Furthermore, Retail Sales are forecasted to
rebound on Friday, signaling that consumption remains healthy despite
higher interest rates. However, with BRC Retail Sales for the same month
indicating a sharp slowdown, there are major downside risks for this
particular release. Nevertheless, should speculation about the BOEs
future policy action remain the dominant theme in British pound trade,
GBPUSD gains may resume.

Equities – FTSE 100 Index

Equities in the UK rallied as the benchmark FTSE 100 Index gained 1
percent to 6567.5 in London, with all but 10 stocks rising. Rio Tinto,
the world's third-largest mining company, climbed 2.6 percent to 3,592
pence as base metals such as copper advanced in London and New York.
Similarly, BHP Billiton, the world's biggest mining company, surged 2.8
percent to 1,303 pence. The gains were only exacerbated after UBS AG
said mergers and acquisitions in the mining industry will likely
accelerate.

Whether the FTSE 100 continues to ascend towards its June 5th highs of
6,686.60 will depend greatly on the outcome of inflation figures on
Tuesday. Both CPI and RPI are estimated to ease back, which could remove
some of the BOEs hawkish bias and leave equity traders more optimistic
that rates will not be raised again in the short-term. However, should
the inflation reports prove that price pressures are stronger than
expected, the FTSE 100 could easily sell-off towards the 6,500 level,
especially after BOE Governor Mervyn King said that the central bank
“may need to take further action” on inflation.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials. FXCM, L.L.C.® does not warrant the
accuracy or completeness of the information, text, graphics, links or
other items contained within these materials. FXCM, L.L.C.® shall not be
liable for any special, indirect, incidental, or consequential damages,
including without limitation losses, lost revenues, or lost profits that
may result from these materials. Opinions and estimates constitute our
judgment and are subject to change without notice. Past performance is
not indicative of future results