- Solid Growth in Australian Services Boosted Australian Dollar Demand – Weakness likely ahead of RBA rate decision
- Pound Weakened as Conservative Government Ruled Out Remaining Within EU Customs Union – Underwhelming services PMI added to bearish mood
- Eurozone Economy Continued to Impress – EUR exchange rates shrugged off softer investor confidence index
- More Aggressive Fed Rate Hike Bets Boost USD – Non-manufacturing index hits twelve-year high
While the TD Securities inflation estimate proved rather weaker than investors would have liked, easing from 2.3% to 2.0%, the mood towards the Australian Dollar still improved on Monday. Even though inflationary pressure is failing to build within the domestic economy as hoped AUD exchange rates were still shored up by a positive services PMI. As the service sector demonstrated solid growth at the start of 2018 this gave investors incentive to buy into the antipodean currency, signalling greater resilience within the economy.
However, the Australian Dollar looks set for fresh volatility today in response to the Reserve Bank of Australia (RBA) policy decision.
Demand for the Pound plunged sharply at the start of the week, coming under pressure as a result of a disappointing UK services PMI. As growth within the service sector slowed to its lowest level since September 2016 this fuelled concerns that the economy lost at least some degree of momentum at the start of the year. Coupled with resurgent concerns over Brexit, driven by the latest signs of division within the Conservative cabinet, this left GBP exchange rates on a bearish footing.
With a significant degree of uncertainty still surrounding the likely future shape of the relationship between the UK and EU the appeal of Sterling may not improve in the near term.
The finalised raft of Eurozone services PMIs offered extra support to EUR exchange rates, adding to hopes that the currency union will see further strong growth this year. Both the German and Italian PMIs saw multi-year highs in January, encouraging greater confidence in the economic outlook. However, this bullishness was tinged by an underwhelming Eurozone Sentix investor confidence index, which slipped from 32.9 to 31.9. Markets also braced for the latest commentary from European Central Bank (ECB) President Mario Draghi, further limiting demand for the Euro.
If the latest Eurozone retail PMI and German factory orders figures keep up the positive trend the Euro could find further support today.
A surprisingly strong ISM non-manufacturing index encouraged the US Dollar to extend its gains further yesterday, boosting confidence in the prospect of a faster pace of Federal Reserve monetary tightening. The measure rose to its highest level in more than twelve years at 59.9, indicating that the world’s largest economy remains in a solid state of expansion. All in all, this only adds to speculation that the Fed will raise interest rates more aggressively over the course of 2018, buoying USD exchange rates.
Even so, with a widening of the US trade deficit forecast for December the mood towards the US Dollar could sour somewhat tonight.
Rising US crude production kept oil prices and the Canadian Dollar under pressure, with Brent crude trending below US$68 per barrel during Monday’s European session. With the general sense of market risk appetite rather muted by the bullish US Dollar and Fed interest rate hike bets there was little to limit the losses of CAD exchange rates.
Should the Canadian trade deficit narrow overnight, though, the Canadian Dollar may find a rallying point.
New Zealand Dollar
As the ANZ commodity price index rebounded moderately in January this helped to limit the softness of the New Zealand Dollar yesterday. While this was not enough to reverse the sharp contraction seen in December’s index NZD exchange rates still took a boost from the data, in spite of the limited sense of risk appetite.
Confidence in the antipodean currency is likely to remain muted ahead of tomorrow’s fourth quarter jobs data, with investors already taking positions for the Reserve Bank of New Zealand’s (RBNZ) February policy decision.
February 6th 10:30 AUD Reserve Bank of Australia Rate Decision 1.50%
February 6th 19:10 EUR Eurozone Retail PMI (JAN) 53.4
February 6th 23:30 CAD Balance of Trade (DEC) -2.3 billion
February 6th 23:30 USD Balance of Trade (DEC) -52 billion
Post by TorFX