On Friday morning it was announced that inflation in Germany has accelerated more than initially reported back in May, caused mainly by the price of oil. The Federal Statistics Office reported that consumer prices increased by 3.1% year-on-year, a 10 basis point increase from an estimate made on May 28th. This could offer further support for the ECB to raise rates sooner rather than later. Later on Friday afternoon the trend of higher inflation continued over in the US. It was reported that the consumer price index had increased by 0.6% during May, which is the biggest monthly increase since November.

Prices climbed 4.2% in May year-on-year, leading many investors to believe that the Fed will start to raise rates as soon as August. The markets have now priced a total increase of 75 basis points by year end.

Both the ECB and BOE are clearly focused on controlling inflation caused by higher commodity prices. In a somewhat unusual move the bank released the transcript of a speech made by the Executive Director Paul Tucker back on April 28th in which he indicated that policy makers must weigh up the significant inflationary risks from the commodity-price shock against the need to 'mop-up' after the credit crisis. In relation to rate expectations in the Euro zone, ECB board member Jose Gonzalez-Paramo added an element of doubt by commenting that, "There is a possibility, not certainty, of a rate increase at our next meeting."

The announcement late last Friday afternoon that 53.4% of voters had voted against the Lisbon treaty will have significant ramifications throughout Europe. At a two-day summit starting in Brussels this coming Thursday the EU's leaders will seek to outline a plan aimed at averting a full-on crisis, but many including the Irish PM have expressed a belief that on this occasion there is no quick fix.

The Irish vote against the Lisbon treat and slightly less hawkish comments from Gonzalez were the main forces behind the Euro's move lower on Friday. The single currency continued to weaken against the dollar as it traded down to test the 1.53 level but was unable to break below. This also dragged GBPUSD down to briefly threaten 1.94. The weaker Euro allowed sterling to push back with EURGBP trading through 0.79.

Tuesday will see the release of the UK's Consumer Price Index. If market expectations for a 3.2% y-o-y rise are correct, this will require an open letter from Mervyn King explaining why inflation has risen above 3%. The minutes from the Bank's meeting earlier this month will be released on Wednesday at 9:30 am. These will be closely scrutinised by market participants for in indication as to the future path of UK interest rates.

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