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The British pound has extended its five day advance and looks poised to test 1.580 over the medium term as policy makers are slowly shifting to the side of Andrew Sentence, and recently stating that the increase in the value added tax in 2011 will put upward pressure on consumer prices. Thus, we may see inflation remain above the central bank’s target longer than expected. Market participants will shift their focus to the GfK consumer survey report. As of late, economists are forecasting the reading to fall to -20 from -19.

In Spain, Acceleration in inflation in July (+1.9%), driven by the VAT hike. According to the preliminary estimation published by INE, prices – measured by the harmonised consumer price index – increased by 1.9% y/y in July, after 1.5% in June. Month-on-month, consumer prices probably decreased by 0.5% (driven by summer sales), after a 0.2% rise in June. No breakdown is available yet, but it seems that the VAT hike – into force since the 1st of July (but largely anticipated by retailers) – was the main driver of the year-on-year increase in consumer prices. However, these exceptional and seasonal effects should not hide the underlying trend. Headline inflation is likely to rise further in the coming months, in line with rising oil prices. Moreover, weak domestic demand and rising unemployment rate are expected to put core prices – which exclude energy and fresh food – under pressure in the coming quarters. On average, headline inflation is forecast to increase by more than 1.5% in 2010 (after -0.2% in 2009), while core inflation is expected to nearly stagnate in 2010 and decrease in 2011. In Germany, The unemployment rate decreased in July (to 7.6%). The unemployment rate fell slightly in July (to 7.6%, after 7.7% in June). The number of unemployed decreased again in July (-0.6% m/m, after -0.6% m/m in June). The number of unemployed has thus fallen by 281K since July 2009 and it is now around 20K above the trough reached in October 2008. The positive evolution in employment index of the composite PMI since the beginning of 2010 (at 53.6 in July, after 52.3 in June) suggests that employment should increase in the coming months. In Eurozone, Economic Sentiment Indicator rose sharply in July (up to 101.3) In July survey data confirmed that eurozone recovery is on track. The Economic Sentiment Indicator (ESI), a good gauge of GDP growth rose to 101.3 in July, above its long-term average, reaching its highest level since March 2008. This strong reading is due mainly to the excellent performance of Germany; the German ESI rose by 4 points to 110.1, its highest reading in three years. While today data signal that the eurozone economy is still expanding at rapid pace, activity is likely to moderate over the last quarter of the year. Global growth, which sustained the strong recovery in the manufacturing sector, is losing momentum and fiscal tightening is likely to weigh significantly on domestic demand. As regard prices, the survey still showed that inflationary pressures were moderate. various releases are scheduled including July’s euro-zone “flash” CPI estimate and the latest unemployment rate. For the former, we expect an annual rate of 1.7% reflecting a pull-back in energy prices a year earlier. We look for the unemployment rate to remain steady at 10%. Finally, in the UK, the GfK consumer confidence survey is due where we envisage an unchanged outturn of -19.

Today’s main data highlight is the advance estimate of Q2 GDP in the US, where we look for 2.8% annualised growth, against a final Q1 outturn of 2.7%. Following Fed Chairman Ben Bernanke’s testimony last week, financial markets continue to perceive significant uncertainty regarding the outlook for US economic activity. Forward-looking business surveys, for example, have been largely disappointing in recent weeks. Consumer confidence – weighed down by a slow pace of private sector job creation – is a case in point. This afternoon sees the final University of Michigan confidence report for July, where we look for an outturn of 65.5 compared with the “flash” estimate of 66.5. St. Louis Fed President James Bullard held a dovish outlook for inflation and said the U.S. faces a similar scenario to Japan as price growth falters, and argued that the FOMC should “expand the quantitative program through the purchase of Treasury securities” in an effort to mitigate the risks for deflation. Although, Mr. Bullard said he expects the downside risks for inflation to subside once the recovery comes into full swing, and warned that keeping the benchmark interest rate at the record-low for too long could be counterproductive and may “encourage a permanent, low nominal interest rate outcome.” In addition, Dallas Fed President Richard Fisher noted further easing in monetary policy could have limited impact on the real economy as households and businesses “are beset by unmanageable uncertainty,” and sees a risk for the economy to be “sailing forward at suboptimal speed, despite the fact that the cost of borrowing is low, equity markets have shown resilience, and liquidity is plentiful.” The comments from the heads of the district central banks suggests the Fed may opt to expand monetary policy further over the coming months in an effort to strengthen the recovery, and may see scope to hold borrowing costs close to zero going into 2011 to counter the substantial amount of slack within the real economy. Nevertheless, as the world’s largest economy is projected to expand at an annualized pace of 2.5% in the second-quarter, with personal consumption forecasted to increase 2.4% following the 3.0% rise during the first-three months of the year, the slower pace of growth could weigh on market sentiment as policy makers anticipate to see a moderate recovery going forward. At the same time, the final reading for the U. of Michigan confidence survey is expected to come in at 67.0 for July from an initial forecast of 66.5, but the market may neglect the upward revision as households continue to face tightening credit conditions along with the ongoing weakness in the labour market.

Yesterday Ukrainian Deputy Prime Minister, Sergey Tigipko, said that the government expects to receive the first $1.89 billion disbursement under Ukraine’s new IMF programme within a few days. This is certainly good news and should further help to stabilise the fragile recovery in the Ukrainian economy. There is quite a bit of EMEA macroeconomic data on the agenda today, but none is likely to bring big market-moving news. Most interesting will probably be Estonian industrial production for June. It will be interesting to see whether the Estonian manufacturing sector has continued to recover or if there are any signs of a soft-spot, similar to what we have seen in Estonian confidence indicators recently.