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Inflationary fears as stimulus package passed in the US

GBP - British Pound

This week starts relatively muted in the UK, with all eyes on Friday's UK GDP month on month figure. Though GDP is always an important piece of data, this reading maybe taken with a pinch of salt by some, as it is backward looking, and there is no surprise about the difficulties the UK economy has had to undergo in recent months from the pandemic.

Chancellor Sunak's budget last week was welcomed by many as a sign that the government is willing to continue supporting the economy at the expense of racking up significant debt, but it will be interesting to look at forward looking data to show signs of how the economy will help itself in coming out of this pandemic and back to pre-Covid levels of growth.

Bank of England Chairman, Andrew Bailey, speaks at 10am this morning in a webinar hosted by the Resolution Foundation, and the market will be keeping a close eye on any rhetoric on how he sees the economic outlook moving forward, and any change of tone from the low interest rate environment that is expected in the UK for years to come.

Key Movers

Over the weekend, we saw the US Senate pass President Joe Biden's $1.9 trillion US Dollar stimulus package, in a party-line vote after an all-night session that saw Democrats battling among themselves over jobless aid and the Republican minority failing to push through some three dozen amendments.

Though the package is deemed as positive for the economy, helping to support ailing parts of the US economy with a much needed cash lifeline, the sheer size of the package raises significant concerns around inflation and devaluing of the US Dollar. With this inflation, raises concerns around how the Federal Reserve will alter their monetary policy to cope.

Whether inflation fears are justified or not remains to be seen. It’s difficult to tell if the current rise in commodity prices is more a function of temporary supply chain disruptions or a truly structural issue that could have longer more lasting implications on price levels.

Nevertheless for now the narrative has shifted squarely towards inflation fears and economic calendar events that haven’t mattered for more than a decade will now take centre stage. There are two key data releases that have been in the shadows for years but will now take the spotlight. CPI and PPI readings on Wednesday and Friday as well as the 10 year and the 30-year bond auction in the later half of the week. If the full CPI reading which is forecast to print at 1.7% comes in closer to 2%, the market will see this as justification for their inflationary concerns and the US Dollar could strengthen with the threat that the Federal Reserve may be forced to increase interest rates sooner than it anticipated.

This again stokes other fears around stalling growth. Higher rates mean that debt costs more to service for both the central treasury and people with mortgages. This means consumer confidence reduces, people spend less and the economy doesn't get the kick start that is so very much needed.

Expected Ranges

GBP/USD: 1.3760 - 1.3865 ▼

GBP/EUR: 1.1610 - 1.1690 ▲

EUR/USD: 1.1820 - 1.1900 ▼

GBP/AUD: 1.7875 - 1.8120 ▲