Underwhelming Inflation Prompts Australian Dollar Slide

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Headlines

  • Australian Inflation Failed to Meet Forecast – AUD exchange rates weighed down as RBA looks set to remain neutral
  • Euro Boosted by Better-Than-Expected German Sentiment – Hawkish signal from ECB may encourage bullish run
  • New Zealand Dollar Shrugged Off Surprise NZ Trade Deficit – Decline in export volumes failed to dent NZD demand
  • Canadian Dollar Benefitted as US Oil Inventories Fell – CAD remains vulnerable to trade tensions



Australian Dollar

Investors were ultimately disappointed by the second quarter Australian consumer price index data, in spite of the headline index strengthening from 1.9% to 2.1%. This improvement still fell short of forecast, with the quarterly inflation rate failing to show any additional acceleration. As a result the Reserve Bank of Australia (RBA) looks set to maintain its neutral policy outlook for some time to come, leaving Australian Dollar exchange rates on a downtrend across the board.

AUD exchange rates could see further losses today if the second quarter import and export price indexes weaken in line with expectations.

Sterling

Although the CBI distributive trades survey showed slightly better-than-expected growth in retail sales in July this failed to shore up the Pound. The outlook across businesses proved less upbeat, with retailers in particular showing greater caution with regards to the future. This suggests that the UK economy may struggle to gain much momentum in the third quarter if conditions do not show any signs of improving. As a result, GBP exchange rates saw muted movement yesterday.

With no fresh UK data set for release today Sterling looks vulnerable to further losses, especially if market worries over Brexit pick back up.

Euro

The Euro found some support on Wednesday as the German IFO business sentiment survey proved more positive than forecast. While both the business climate and expectations indexes weakened on the month the decline was minimal, limiting any negative impact on EUR exchange rates. Even so, the single currency struggled to return to a bullish trend thanks to market worries over the potential for EUR-US trade tensions to escalate further.

However, if European Central Bank (ECB) President Mario Draghi takes a more upbeat tone after tonight’s policy meeting then the mood towards the Euro could improve.

US Dollar

USD exchange rates lost further ground overnight thanks to a disappointing new home sales figure for June. As sales contracted -5.3% on the month this undermined confidence in the health of the US housing market, encouraging investors to sell out of the US Dollar. Another weekly decline in mortgage applications added to the bearish mood. Nevertheless, the downside potential of USD exchange rates remains limited as market jitters over trade persist.

A widening of the advance goods trade deficit could put additional pressure on the US Dollar tonight, fuelling uncertainty and worries over the protectionist policies of the Trump administration.

Canadian Dollar

A sharp drop in US crude oil inventories helped to boost the Canadian Dollar once again, with oil prices pushing higher in response to the figures. With tensions between the US and Iran still heightened this encouraged hopes that the global supply glut will continue to diminish. Softening USD exchange rates also benefitted the risk-sensitive Canadian Dollar.

Even so, CAD exchange rates remain vulnerable to any escalation in US protectionist rhetoric.

New Zealand Dollar

June’s New Zealand trade data did not make for particularly encouraging reading, with the trade balance unexpectedly sliding into a deficit of -113 million. The decline was driven by a weaker-than-expected month of exports, highlighting the continued vulnerability of the New Zealand economy and increasingly tumultuous global trade landscape. However, NZD exchange rates remained on a relatively positive footing thanks to a weaker US Dollar.

Demand for the New Zealand Dollar will continue to follow the direction of market risk appetite today.

Data Released

July 26th 11:30 AUD Import Price Index (QoQ) (2Q) 1.9%
July 26th 11:30 AUD Export Price Index (QoQ) (2Q) -1.3%
July 26th 21:45 EUR European Central Bank Rate Decision 0.0%
July 26th 22:30 USD Advance Goods Trade Balance (JUN) -66.6 billion

Post by TorFX

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