Australian Dollar Slumps on Disappointing Fourth Quarter Inflation

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Headlines

  • Underwhelming Inflation Rate Prompted Australian Dollar Slide – Robust manufacturing PMI may limit AUD downside
  • Pound Under Pressure After EU Rejected City Blueprint for Brexit Deal – Investors spooked by continued threat to UK financial services
  • Better-Than-Expected Eurozone Inflation Boosted Euro Exchange Rates – Odds of ECB hawkishness lifted
  • State of the Union Address Failed to Shore Up USD – Concerns remain over US trade outlook

Australian Dollar

Markets were ultimately disappointed by the fourth quarter Australian consumer price index, which fell short of forecast despite rising to 1.9% on the year. This remains below the Reserve Bank of Australia’s (RBA) target range, suggesting that the central bank will leave interest rates on hold for the foreseeable future. A disappointing Chinese manufacturing PMI also put pressure on the Australian Dollar, encouraging further risk-off trade.

Even if January’s manufacturing PMI betters expectations to show solid expansion on the month this may not be enough to boost AUD exchange rates today.

Sterling

While the GfK consumer confidence index showed a moderate improvement on the month this failed to shore up the Pound. Confidence in Sterling was generally dented by reports that EU officials have rejected the City of London’s blueprint for a post-Brexit free trade deal on financial services. This naturally sparked fresh concerns over the negative impact that leaving the EU will have on the UK economy, especially as investors remain less-than-convinced by the stability of Theresa May’s leadership.

Unless the latest UK manufacturing PMI indicates that the economy started 2018 on a stronger footing the appeal of Sterling is likely to remain limited.

Euro

A fresh boost was in store for the single currency overnight as the Eurozone consumer price index bettered forecast. As the headline inflation rate showed a smaller dip than expected, clocking in at 1.3%, this encouraged hopes that the European Central Bank (ECB) will take an increasingly hawkish view in the coming months. Although inflation is unlikely to rise to the central bank’s target any time soon the odds of the quantitative easing program being wound down sooner rather than later are on the rise.

Today’s raft of Eurozone manufacturing PMIs are unlikely to provoke particular volatility for the Euro, with no real change forecast from the provisional readings.

US Dollar

The 2018 State of the Union address offered little in the way of support to USD exchange rates, which remained under pressure in the wake of the speech. As any detail on the Trump administration’s long-awaited increase in infrastructure spending was decidedly lacking, and the message on trade remained combative, this disappointed investors. A sharp contraction in pending home sales also underscored the vulnerabilities that remain within the world’s largest economy.

Tonight’s ISM manufacturing index could improve confidence in the domestic outlook, though, to the benefit of the US Dollar.

Canadian Dollar

CAD exchange rates found support as November’s Canadian gross domestic product data surprised to the upside. As growth accelerated to 3.5% on the year this encouraged greater optimism in the domestic outlook, fuelling hopes that the Bank of Canada (BOC) could return to a more confident tone. Even though US crude inventories showed an uptick on the week, keeping oil prices under pressure, this was not enough to dent the Canadian Dollar.

A positive result from the latest Canadian manufacturing PMI could see CAD exchange rates making further gains.

New Zealand Dollar

Even in the absence of fresh domestic data the New Zealand Dollar was able to extend its uptrend across the board, capitalising on the relative weakness of the US Dollar. Although markets have been betting on the prospect of the Federal Reserve raising interest rates at a faster pace over the course of 2018 this failed to keep NZD exchange rates under particular pressure. The ‘Kiwi’ also benefitted from a softer Australian Dollar.

However, any particular shift in market risk sentiment could return the New Zealand Dollar to a bearish bias.

Data Released

February 1st 08:30 AUD Manufacturing PMI (JAN) 54.4
February 1st 19:00 EUR Eurozone Manufacturing PMI (JAN F) 59.6
February 1st 19:30 GBP Manufacturing PMI (JAN) 56.5
February 2nd 00:30 CAD Manufacturing PMI (JAN)
February 2nd 01:00 USD ISM Manufacturing Index (JAN) 58.6

Post by TorFX

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