Rising Inflation Fails to Prevent Extended Euro Downtrend

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  • Inflation Data Fails to Offer Australian Dollar Rallying Point – Risk aversion weighs heavily on AUD exchange rates
  • Euro Unable to Capitalise on Higher Eurozone Inflation Rate – Doubts remain over prospect of ECB hawkishness
  • Strong Employment Data Encourages US Dollar Gains – Signs point towards solid non-farm payrolls report
  • Pound Strengthens in Spite of Weaker Consumer Confidence – GBP exchange rates benefit from temporary lull in Brexit anxiety

Underwhelming Inflation Data Adds to Australian Dollar Softness

As the headline annual consumer price index eased from 2.1% to 1.9% in the third quarter this left the Australian Dollar on a weaker footing. With the inflation rate now falling short of the Reserve Bank of Australia’s (RBA) 2% target the likely timing of an interest rate hike appears more distant. Confidence in the ‘Aussie’ weakened further as October’s Chinese manufacturing PMI underperformed expectations, with a reading of 50.2 showing that the sector slowed to a state of near-stagnation.

If the Australian trade surplus widened on the month in September, however, this could offer AUD exchange rates a rallying point today.

Pound Shakes Off Weakening UK Consumer Confidence

While the GfK consumer confidence index weakened further in October this was not enough to drag GBP exchange rates lower. Investors had anticipated this latest decline in sentiment as Brexit-based uncertainty continues to hang over the domestic outlook. However, in the absence of any fresh political developments the Pound benefitted from a temporary easing in market jitters. Although the odds of a no-deal Brexit remain heightened this did not prevent GBP exchange rates from rallying last night.

The Bank of England’s (BoE) November policy announcement and the release of the quarterly Inflation Report are likely to provoke significant volatility for the Pound.

Euro Fails to Benefit From Stronger Eurozone Inflation

Although the Eurozone consumer price index strengthened as forecast in October EUR exchange rates remained on a downtrend. Even with the headline inflation rate continuing to accelerate above the European Central Bank’s (ECB) 2% target the potential for further policy tightening looks limited. After Tuesday’s weaker growth data the case for looser monetary policy has increased, leaving the ECB with a delicate balancing act. A sharp contraction in German retail sales added to the Euro’s weakness, meanwhile.

In the absence of any fresh domestic data today the single currency looks set to remain on the back foot against its rivals.

Signs of Further Labour Market Tightening Boost US Dollar

A solid increase in October’s ADP employment change figure encouraged investors ahead of Friday’s non-farm payrolls report. With the US labour market continuing to demonstrate signs of tightening USD exchange rates remained in a bullish mood. Even though the latest Chicago purchasing manager index fell short of forecast this was not enough to dampen the appeal of the US Dollar overnight. The general increase in market risk aversion also helped to short up the safe-haven USD.

If the ISM manufacturing index also shows an easing on the month, though, this could put some pressure on USD exchange rates.

Canadian Dollar Lacks Support After Mixed Growth Data

A surprise uptick in Canada’s August gross domestic product on the year failed to give CAD exchange rates any particular boost. This improvement in growth was undermined by a slight slowdown on the month, suggesting that the Canadian economy is struggling to find fresh momentum. With oil prices still under pressure there was little incentive to favour the Canadian Dollar yesterday.

CAD exchange rates could see further weakness if tonight’s manufacturing PMI also points towards weakening domestic growth.

Weakening ANZ Activity Outlook Prompts NZD Downtrend

Confidence in the New Zealand economy continued to deteriorate in the wake of a weaker ANZ activity outlook index and a contraction in building permits. This left the New Zealand Dollar trending lower across the board yesterday, especially in the face of declining market risk appetite. While October’s ANZ business confidence index showed a modest improvement this failed to give NZD exchange rates any support.

Unless market sentiment picks up the New Zealand Dollar is likely to remain biased to the downside in the near term.

Data Released

November 1st 08:30 AUD Manufacturing PMI (OCT) 56
November 1st 11:30 AUD Trade Balance (SEP) 1.7 billion
November 1st 23:00 GBP Bank of England Rate Decision 0.75%
November 2nd 00:30 CAD Manufacturing PMI (OCT) 54.5
November 2nd 01:00 USD ISM Manufacturing (OCT) 59

Post by TorFX

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