Headlines

* UK inflation remains stuck at 8.7%, core rises to highest in 31 years

* BoJ debated risk of being too late in raising rates

* Fed Chair Powell reports to Congress amid rates uncertainty

* Asian stocks slip as suspense builds for China, Fed news

FX: USD was marginally stronger as markets got back to work after the US holiday. The DXY is trading around its 50-day SMA at 102.63. The 2-year yield remains near 3-month highs at 4.80% set last Wednesday. The 10-year yield top from late May sits at 3.85%. It fell sharply on Tuesday to settle at 3.72%.

EUR printed a doji candle closing at 1.0918. It finished on Monday at 1.0921. GBP felt to 1.2713 before closing at 1.2764. Strong UK inflation data today has seen only a small bid. Markets are worried about stagflation – slow growth and high inflation. USD/JPY made a fresh cycle high at 142.25 before settling at 141.44. Prices are just above the 142 handle this morning. We had dovish comments from a BoJ official after the outdated April meeting minutes. AUD suffered amid cautious risk appetite. The aussie dropped back into the long-held range below 0.68. USD/CAD posted a high at 1.3269 before finishing below the early February low.

Stocks: US equities closed lower in a choppy session. Initial weakness came due to apparent quarter-end and month-end selling. But softer yields saw the downside limited. The benchmark S&P 500 lost 0.47% and the Nasdaq 100 finished 0.9% lower. The Dow closed 0.72% lower. An unexpected spurt in new home construction put housing starts at their highest level in more than a year. This suggested domestic demand remained strong with consumers not deterred by high borrowing costs.

Asian stocks were mostly muted amid a lack of macro drivers and ahead of Fed Chair Powell’s testimony. The Nikkei 225 initially sold off but climbed off its lows as Softbank gained. The Hang Seng was lower and underperformed on tech losses.

US equity futures are indicating a mildly softer open. European equity futures are pointing to a slightly higher open. The Euro Stoxx 50 closed down 0.4% yesterday.

Gold remained subdued. It traded at the bottom of its recent range. Last week’s spike low is at $1925.

Day Ahead – Powell testimony centre stage

Ahead of tomorrow’s BoE meeting, we get the world’s most important central banker on the wires today with Fed Chair Powell speaking in front of Congress in his semi-annual testimony. While last week’s FOMC projections were on the hawkish side, Powell was slightly more circumspect at his press conference as he stressed future policy decisions would still be data dependent and done on a meeting-by-meeting basis. Which Powell will we get later today?

Steeply inverted bond yield curves imply tough times ahead while market/Fed divergence seen earlier this year finished with the market pricing in more rate hikes and siding eventually with the FOMC. The recent updated dot plot implied two more additional rate hikes. The market prices in one, giving it a 79% chance. The dollar has rolled over and risky markets have ignored this. Participants are currently more concerned about softening activity data and slowing inflation and inflation expectations.

Chart of the Day – EUR/GBP holds support

After the ECB’s relatively hawkish meeting last week, we’ve had a phalanx of ECB speakers. They can’t but subscribe to ECB’s Lagarde’s commitment to take a next 25 bps step at the July meeting. What happens later is subject to an internal debate. Hawks clearly indicate that the ECB has further to go at the September meeting as core inflation continues its higher for longer path. More dovish oriented members like chief economist Lane stress the current data dependent ECB-mode. This makes it too early to already guess on the appropriated policy action in September. Meanwhile, the BoE is expected to continue hiking for a prolonged period, lifting rates up to 6% from 4.5% currently. This is now nailed on by markets by December. The chance of a 50bp hike in the coming meetings is very high after today’s ugly CPI data.

EUR/GBP had traded in a range for several months this year until a breakdown in early May. Support became resistance at 0.8721 and after trading sideways below there, the pair broke down again. We’ve now fallen to the December lows around 0.8547 with Monday’s low at 0.8518 a mark of support. Prices need to get above 0.8635 to slow the solid downtrend. Much could depend on Thursday’s BoE.