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Currency markets are broadly lacking in conviction this morning, with the British pound the only significant mover among the majors, and the dollar inching lower against its rivals in generally-directionless trading. 

Equity markets and commodity prices are unimpressed after the People’s Bank of China and the National Financial Regulatory Administration told lenders to roll over outstanding loans to property developers – a step that might prevent a string of defaults, but which won’t do much to improve household confidence. After what might have been the biggest property bubble in history, many cities are overbuilt, local governments and millions of households are carrying too much debt, and the price-expectations loop has been broken. We suspect more stimulus is coming, but that it will be targeted to avoid another melt-up in real estate markets.

The pound jumped to a 15-month high and gilt yields surged this morning after an acceleration in private sector wages raised the likelihood of another half-percent rate hike at the Bank of England’s August meeting. Numbers from the Office for National Statistics showed the annual growth rate in weekly earnings excluding bonuses hit 7.7 percent in the three months to May, topping market expectations set at the 7.5 percent mark, and quickening from the 7.6 percent pace hit in the previous period. This was well above the 6.3 percent rate projected by the central bank in May, and has driven markets back to betting on a terminal rate close to 6.5 percent – even as hard landing risks grow stronger. In a speech yesterday, Governor Bailey said “Both price and wage increases at current rates are not consistent with the inflation target. The interaction of above-target headline inflation with labour market tightness and demand pressure in the economy has made underlying developments in goods and services price inflation more sticky than previously expected”.

Today’s calendar looks extraordinarily light. To our knowledge, the only potential market-moving event is a speech from the Reserve Bank of Australia’s Governor Lowe – and his words aren’t terribly likely to have broader implications for currencies. 

If the horror-movie trope can be believed, the timing is perfect for an unexpected event. 

Tomorrow’s US consumer price index update could prove pivotal in setting interest-rate pricing across the front end of the curve. If the core measure fails to fall to 5 percent on a year-over-year basis and the so-called “supercore” aggregate stays stickier than expected, market-implied odds on an autumn rate hike could climb, putting upward pressure on Treasury yields and the dollar, while a softer read might renew bets on a one-and-done approach.

The Bank of Canada’s decision will have a meaningful impact on Canadian rates, but could also have spillover effects by foreshadowing the communication strategies that will be deployed at other central banks in months to come. Officials are likely to maintain a hawkish bias in the accompanying statement, highlighting strong employment, growth, and inflation data in justifying continued vigilance – but with evidence of an incipient slowdown beginning to accumulate, the quarterly Monetary Policy Report could place more emphasis on the downside risks that are growing at borrowing costs rise across the household sector.

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