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UK CPI rose by 3.2% y/y in June 2010 compared to 3.4% in May, more than the 3.1% average forecast by analysts. RPI decelerated to 5.0% in June compared to 5.1% in May. RPI-X also slowed from 5.1% in May to 5.0% in June. However, core inflation accelerated from 2.9% in May to 3.1% in June, which matched the highest reading since 1997. According to the Office for National Statistics, the biggest downward pressure to CPI inflation between May and June came from falling energy (petrol and diesel) prices. Another significant downward contribution came from clothing and footwear, where prices fell due to the June sales season.

The latest inflation data will boost the case by Andrew Sentance who is the sole member of the MPC who is looking for a gradual interest rate rise and said the path to economic recovery could be uneven but that did not equate to a risk of a double-dip recession. “I favour a gradual rise in Bank Rate which would be aimed to avoid destabilising confidence through a sudden lurch in policy.”

Sterling reacted well against the Dollar and moved up to above the 1.52 levels at the close of play from opening at 1.4996.

In European news yesterday, the rating agency Moody’s downgraded Portugal’s debt rating by two notches to A1 from its previous AA2 rating, with a stable outlook. Moody’s explained the downgrade with the ongoing deterioration in the debt ratio as well as the dim medium-term growth outlook. Markets showed little reaction to the news, probably because Moody’s initially placed Portugal on credit watch in May 2010. The euro held steady against the dollar after a smooth Greek Treasury bill auction eased some concerns about Europe’s debt crisis, this helped take the sting out of Portugal’s expected credit rating downgrade and disappointing German Zew index.  Today the dollar could receive a boost, especially against the higher yielding currencies, in reaction to robust U.S corporate earnings from Intel Corp. Other major U.S corporates to report quarterly earnings this week include JP Morgan, Chase & Co and Bank of America.

The main focus this morning will be UK job data. Markets expect claimant count to drop by -20k in June while unemployment rate is expected to be steady at 7.9%. Eurozone CPI final and industrial production will also be released. In the US, main focus will be on retail sales, which is expected to drop slightly by -0.2% in June. Import price index and business inventories will also be released. Also, another main focus will be on FOMC minutes.

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