ECB Expected to Raise Rates Next Week (page 2 of 2)

UK department store chain John Lewis and Grocery chain Waitrose also reported strong sales last week which confirms the improvement in household spending. Bank of England Economist Bean warned that higher energy prices could be here to stay, which would continue to squeeze margins and inflation.

In the week ahead, unlike the rest of the world, the UK economic calendar is relative light. We are only expecting a few pieces of housing market data, consumer confidence and the manufacturing and service sector PMI reports.

Japanese Yen

The Japanese Yen strengthened against the dollar for the third consecutive day. The rally has been so strong that it erased the past 3.5 weeks of losses. In addition to the hawkish comments from Bank of Japan Governor Fukui, the central bank of China (PBoC) also announced last night plans to improve the Yuan exchange rate mechanism, which would be another step that the central bank is taking towards an eventual free float.

It has been reported that China may also be issuing Yuan bonds in Hong Kong while more funds are beginning to increase their exposure to China. Meanwhile adding to yesterday's comments, Fukui said today that the conditions for removing quantitative easing continue to come into place and that they "cannot always be fearing failure." Regardless of what Fukui says, this is really a test of where the power of monetary policy lies.

The government has previously said that the BoJ is not independent, but the BoJ after tempering their words for a few weeks have restarted their hawkish comments in force, saying that as soon as their conditions for removing quantitative easing are met, they will proceed promptly with changing policy.