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UK gilts surge ahead of 10-year auction, BoE’s monetary policy meeting

The UK gilts surged Monday as investors wait to watch the country’s 10-year auction and the Bank of England’s (BoE) monetary policy meeting, scheduled to be held on June 20 and June 21 by 09:45GMT and 11:00GMT respectively.

The yield on the benchmark 10-year gilts, slumped 1-1/2 basis points to 1.41 percent, the super-long 30-year bond yields slid 1 basis point to 1.76 percent and the yield on the short-term 2-year too traded nearly 1 basis point lower at 0.71 percent by 10:00GMT.

Brexit is set to continue to dominate attention in the coming week. And political confusion continues to reign, with the government’s compromise proposal on whether Parliament should have a ‘meaningful vote’ on the final withdrawal agreement – and crucially what to do if there is no agreement – rejected by Conservative Party ‘remainer’ rebels. Key votes, in the House of Lords today, but in particular in the House of Commons on Wednesday, could trigger a political crisis. 

Meanwhile, in terms of the regular economics news-flow, after a busy week for top-tier releases – which painted a mixed picture of activity in Q2 – the main event be the BoE’s MPC meeting, with the policy decision to be announced on Thursday. Markets (appropriately) see a probability of less than 10% of a rate hike. And our central scenario is for no change until November. However, notwithstanding political risks, the strength of last week’s May retail sales figures (up 1.3%M/M) has likely increased the chances of a hike at the time of August’s Inflation Report.

The statement accompanying this month’s meeting may give some insight into MPC’s latest thinking on the strength and sustainability of the rebound in Q2 growth. On the same day, the May public finance figures should confirm that borrowing continues to improve compared to last FY, although the government's plans to spend an extra GBP20 billion on the health service on top of the imminent hit to the public finances from the impact of Brexit raise additional questions about UK fiscal sustainability.

Meanwhile, the FTSE 100 traded 0.27 percent higher at 7,528.93 by 10:05GMT, while at 10:00GMT, the FxWirePro's Hourly Pound Strength Index remained neutral at 54.87 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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