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Hot UK Inflation Lifts Global Yields, Leaves Currencies Largely Unmoved

Famous last words perhaps, but today is shaping up to be a quiet one in currency markets. Treasury yields and the trade-weighted dollar are inching higher after a hotter-than-expected British inflation print put upward pressure on global interest rates and pushed equity and commodity futures into a defensive posture – but trading ranges remain unspectacular relative to recent months.

The British pound jumped this morning after the latest inflation numbers topped expectations, making a rate increase at the next Bank of England meeting far more likely. According to data released by the Office for National Statistics, consumer prices climbed 10.1 percent in the year to March, down from 10.4 in the prior month, but well above the 9.8 markets had anticipated. Energy prices fell, but food costs were up an incredible 19.1 percent year over year, while the core basket, which excludes food and energy prices, remained unchanged at 6.2 percent. A closely-watched measure of services prices remained at 6.6 percent. Taken in combination with yesterday’s strong employment numbers, a hike at the central bank’s May meeting now looks overwhelmingly plausible.

There are no major data releases on the North American calendar, and jawboning from Federal Reserve officials should be minimal: Chicago’s Austan Goolsbee is scheduled for an interview at 5:30 this evening, and New York’s John Williams will discuss the economic outlook at 7:00.

The debt ceiling drama is getting louder. Republicans are reportedly planning to table a bill next week that would raise the borrowing limit in exchange for sharp spending cuts, but extreme divisions within the party are raising doubts as to whether the measure will pass the House, much less make it through the Senate. With tax revenues coming in below expectations, a number of fiscal experts have warned the Treasury’s extraordinary measures could run out of room in early June, pushing the government into technical default. Credit default swaps on US debt are now more expensive than during the 2011 debt ceiling standoff and the likelihood of a wider burst of financial markets volatility around the deadline is rising – even if the risk of a missed payment remains relatively low.

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