UK CPI rose 9.4% yoy in June against market expectations of a 9.1% rise

Global developments

UK CPI rose 9.4% yoy in June against market expectations of a 9.1% rise. This could likely prompt the BoE to hike by 50bps in the upcoming policy. 

Today is an all important day for Europe. The ECB rate decision is due today. The ECB is to commence it's rate hike cycle today with at least a 25bps hike. There is a possibility it could hike by 50bps as well. It will also be rolling out details of its crisis management tool (transmission protection mechanism) that would help insulate countries with higher Debt to GDP (peripheral countries like Italy, Spain, Greece and Portugal) from effects of rate hike cycle. Italian politics will also be in focus. The Draghi government is on the brink of collapse as coalition partners have said they would boycott the confidence vote. The scheduled maintenance of Nordstream 1 pipe line which supplies gas from Russia to Europe is to end today. It remains to be seen whether the original supply is restored. 

President Biden is likely to hold talks with Xi Jinping in the next 10 days. Discussion on tariffs would be on the table.

Price action across assets

US yields have cooled off 2-3bps across the curve. The Dollar has strengthened against majors. 

Brent is steady around USD 106 per barrel while Gold has slipped below USD 1700 mark, a one year low. S&P500 built on rally of previous session to end 0.6% higher. Asian equities are trading mixed. 

Domestic development

The government rolled back the windfall profit tax for oil companies. Export duty on petrol was scrapped altogether while that on ATF, diesel and crude exports was reduced.

USD/INR

Pressure on the Rupee continues. We have been seeing incessant bids throughout the session and even the shallowest dips are being bought into. Rupee traded a 79.90-80.00 range yesterday. Central bank was likely present around 80 mark. 

Rupee is likely to trade a 79.85-80.15 range intraday. 

Short term forward yields rose 3-5bps while 1y yield remained unchanged at 3.20%. 3m ATMF implied volatility dropped 17bps to 5.53% on low realised volatility. 

Bonds and rates

Yield on the benchmark 10y ended 1bps higher at 7.45%. T-Bill cutoffs came in higer than expected (1y at 6.24%). 5y OIS ended almost flat at 6.55%. We expect the bonds to trade sideways today. 

Equities

The Nifty ended 1.1% higher yesterday at 16520. IT stocks and Oil and Gas stocks led the rally. SGX is indicating a flat open for Nifty around 16500 mark. 

Cross currencies

EUR/USD

Collapse of the government in Italy looks almost inevitable now. This has put the Euro under renewed pressure. Tone of the ECB will be focused on to gauge its commitment to rate hike cycle. 1.03-1.0360 zone is a crucial resistance for Euro. We expect the price action in Euro to be choppy today. The pair is expected to trade in an intraday range of 1.0150-1.0270 levels.

GBP/USD

The Pound fell after the highest CPI print in 40 years as prospects of a bigger rate hike by the BoE raised fears of an economic hard landing. 1.2050-1.21 is proving to be a resistance zone for the Sterling. The pair is expected to trade sideways in an intraday range of 1.1940-1.2020 levels.

USD/JPY

Bank of Japan policy is also due today. BoJ is likely to maintain status quo. Yen could continue to remain under pressure and make a fresh attempt at 140 mark. The pair is expected to trade with a bullish bias in an intraday range of 137.90-138.80 levels.