German Coalition Breakthrough Fails to Invigorate Euro

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Headlines

  • Improved Construction PMI Failed to Shore Up Australian Dollar – RBA policy outlook mutes AUD demand
  • Euro Under Pressure Despite German Coalition Breakthrough – Possibility of further political turmoil remains
  • New Zealand Dollar Shrugged Off Improved Unemployment Rate – Weak wage growth continues to limit NZD outlook
  • Risk Aversion Continued to Benefit US Dollar – Threat of second US government shutdown averted

Australian Dollar

While January’s Australian construction PMI showed a solid strengthening on the month the mood of AUD exchange rates remained generally bearish yesterday. Even though the reading of 54.3 indicates that the construction sector is in a robust state of growth this was not enough to ease lingering concerns over the wider domestic outlook. A sharp dip in Australia’s foreign reserves gave investors extra incentive to sell out of the Australian Dollar.

Commentary from Reserve Bank of Australia (RBA) Governor Philip Lowe could push the ‘Aussie’ lower today, with any dovishness likely to dent confidence further.

Sterling

Another contraction in the Halifax house price index helped to keep the Pound under pressure on Wednesday, pointing towards continued weakness within the domestic housing sector. Jitters over Brexit also weighed on demand for Sterling, with markets still discouraged by the Conservative government’s stated intention to leave the EU customs union. With the full picture of what UK negotiators wish to get out of Brexit talks still unclear there was little upside for GBP exchange rates.

Tonight’s Bank of England (BoE) policy decision and quarterly Inflation Report are likely to provoke additional volatility for Sterling.

Euro

As December’s German industrial production figures fell short of forecast, showing a contraction on the month, the appeal of the Euro diminished. Investors were still encouraged, however, to hear news of a breakthrough in coalition talks between Angela Merkel’s CDU/CSU and the SPD. While a deal was reached in principle, though, this still needs to be approved by the SPD’s members in the next few weeks, leaving the possibility of another collapse open.

The latest European Central Bank (ECB) Economic Bulletin could offer EUR exchange rates a rallying point, providing that it strikes a more hawkish tone on the subject of inflation.

US Dollar

The more risk-off mood of markets continued to benefit the US Dollar overnight, especially as the threat of another US government shutdown was averted. Even though the odds of a March interest rate hike from the Federal Reserve have fallen back somewhat in recent days USD exchange rates remain well supported. Although New York Fed President William Dudley took a slightly more cautious view in his latest comments this was not enough to diminish demand for the US Dollar.

Unless other Fed policymakers take a more noticeably dovish tone in upcoming comments USD exchange rates are unlikely to suffer particular downside pressure.

Canadian Dollar

Confidence in the Canadian Dollar improved in response to a 4.8% jump in building permits on the month in December. Even though this was not enough to reverse the previous month’s contraction this still helped to boost optimism in the domestic outlook. The continued volatility of global stock markets and softer oil prices still prevented any significant uptick in CAD exchange rates, however.

If tonight’s housing starts and new housing price index figures offer further cause for confidence in the Canadian economy, though, demand for the Canadian Dollar could strengthen.

New Zealand Dollar

NZD exchange rates rallied in the wake of the fourth quarter New Zealand unemployment rate, which showed a surprise improvement to fall to a fresh nine-year low. However, the New Zealand Dollar struggled to hold onto its initial gains for long thanks to the continued lacklustre performance of average hourly earnings. With wage growth still proving weak the chances of any change in the Reserve Bank of New Zealand’s (RBNZ) policy outlook are distinctly limited.

Should RBNZ Acting Governor Grant Spencer opt for a cautious message in comments today the mood towards the ‘Kiwi’ could sour even further.

Data Released

February 8th 10:00 NZD RBNZ Acting Governor Spencer at Parliament Select Committee
February 8th 19:00 EUR ECB Publishes Economic Bulletin
February 8th 19:00 AUD RBA Governor Lowe Speech
February 8th 22:00 GBP Bank of England Rate Decision 0.50%
February 8th 22:00 GBP Bank of England Inflation Report
February 8th 23:15 CAD Housing Starts (JAN) 210,000

Post by TorFX

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