British gilts to remain cautious over Fed meeting

Trading in the British gilts market is expected to remain cautious ahead of an expected interest rate rise from the US Federal Reserve this week.
The Fed is widely expected to raise rates by a quarter point from their 46-year low of 1.0 percent at its June 29-30 meeting, but the statement accompanying the rate announcement will be read closely for hints about the Fed's overall path of policy.
"The wording of the FOMC statement is likely to determine how markets react to the committee's decisions," said Stephen Lewis, chief economist at brokerage Monument Securities.
"The key question is whether the FOMC will retain the word 'measured' in its characterisation of prospective policy tightening."
An unexpected 1.6 percent drop in US durable goods orders for May and a downward revision in first quarter growth to 3.9 from 4.4 percent have reinforced expectations will raise rates in modest steps.
Gilts scaled three-week highs earlier this week on a survey showing the recovery in Britain manufacturing sector lost momentum in June and on comments by Bank of England Governor Mervyn King that the central bank had not abandoned its gradualist approach.
The BoE has raised interest rates four times since November to 4.50 percent to rein in inflationary pressures as the economy gathered momentum.
Gilt investors will also have a number of key local economic releases to digest this week, the most closely-watched being the BoE's household lending data.
Economists polled by Reuters estimate consumer credit rose by 1.4 billion pounds in May after 1.3 billion pounds in the previous month.
Also attracting close attention will be latest figures for the number of approvals for house purchases, following a fall in approvals to 124,000 in April from 132,000 in December.
"It is still early days, but this would provide more concrete indications that the housing market is coming off the boil and would remove a large degree of urgency that the MPC might have to tighten policy again," said Philip Shaw at Investec.
Other economic data to be published this week include the final first quarter growth, domestic product data and balance of payments on Wednesday, and CIPS/Reuters manufacturing sector survey on Thursday.
Investors will be reluctant to go too short on bonds amid ahead of the handover of power to the transitional Iraqi government this week.
At least 100 people were killed and hundreds wounded in Iraq in a wave of attacks on Thursday. A group led by Zarqawi, who Washington says has links to al Qaeda, claimed responsibility for the attacks.