Weaker-Than-Forecast Inflation Weighs Down US Dollar

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  • AUD Exchange Rates Gain Ground in Spite of Stock Market Selloff – Investor confidence boosted by weak US data
  • Pound Weakens as Comments Suggest Hurdles to Brexit Agreement Remain – Jitters to persist ahead of EU summit
  • US Dollar Falls Out of Favour on Underwhelming Inflation Data – Odds of Federal Reserve interest rate hike dented
  • Italian Budget Disagreement Continues to Limit Euro Demand – Conflict between Italy and European Commission shows no sign of resolution

Australian Dollar Defies Decline in Market Risk Appetite

A sharp decline in world stocks failed to weigh on AUD exchange rates, even though the selloff was in part driven by lingering worries over the US-China trade dispute. The Australian Dollar instead found support as a result of weaker-than-expected US consumer price index data, which undermined the case for another Federal Reserve interest rate hike. October’s Australian consumer inflation expectation survey showed no change on the month, meanwhile, limiting the downside pressure on the ‘Aussie’.

If August’s home loans figure shows a contraction as forecast, though, this may see AUD exchange rates pushed lower this morning.

Markets Doubt Likelihood of Imminent Brexit Agreement

Speculation over Brexit drove GBP exchange rate volatility yesterday as investors continued to weigh up the odds of the UK and EU reaching a deal on Monday. As officials indicated that the Irish border issue is still unresolved this limited the appeal of the Pound, especially as the DUP expressed displeasure over Theresa May’s proposals. A surprise contraction in September’s RICS house price balance added to the bearish mood of Sterling.

Unless investors see concrete signs of progress towards a Brexit deal the Pound is likely to shed further ground.

Euro Unable to Shake Off Italian Budget Worries

European Commissioner Pierre Moscovici failed to encourage any significant Euro resurgence as he noted that ‘we need, absolutely, to make sure that the Italian debt decreases’. With Italian officials sticking by their budget proposals the stage looks set for further disagreement between the two sides. This left EUR exchange rates lacking in support, although the weaker US inflation data gave the single currency a modest boost overnight.

Another contraction in Eurozone industrial production in August could drive the Euro into a fresh slump this evening.

Inflation Miss Drags US Dollar Lower

As Trump launched a fresh attack on the Federal Reserve and its tighter monetary policy this limited the appeal of the US Dollar. Although this intervention is unlikely to alter the currency policy outlook of the Fed investors were still discouraged by the comments. USD exchange rates saw a larger sell-off in the wake of September’s consumer price index data, with the headline inflation rate proving weaker than forecast to ease from 2.7% to 2.3%.

Any uptick in the University of Michigan consumer sentiment index may offer the US Dollar a boost tonight, with the odds of a Fed rate hike still elevated.

Canadian Dollar Weakens as Stock Market Turmoil Weighs on Oil Prices

Oil prices continued to slide overnight with Brent crude falling -2% as global stocks dipped and risk appetite declined. This left the Canadian Dollar on a weaker footing as worries over the outlook of the oil market and wider global trade picture mounted. A monthly stagnation in August’s new housing price index added to the softness of CAD exchange rates, underscoring the weaker nature of the Canadian housing market.

If market confidence remains muted today the Canadian Dollar could struggle to find any leg up against its rivals.

Modest Contraction in Food Prices Encourages NZD Gains

As September’s New Zealand food price index only showed a -0.1% contraction on the month this helped to shore up NZD exchange rates. While inflationary pressure within the domestic economy remains weak investors were relieved that the decline was not larger. With underwhelming US inflation putting the US Dollar under pressure the mood of the ‘Kiwi’ picked up further.

This morning’s manufacturing PMI may dent the New Zealand Dollar, however, if the sector loses momentum on the month.

Data Released

October 12th 08:30 NZD Manufacturing PMI (SEP) 51.8
October 12th 11:30 AUD Home Loans (MoM) (AUG) -1.0%
October 12th 20:00 EUR Eurozone Industrial Production (YoY) (AUG) -0.3%
October 13th 01:00 USD University of Michigan Consumer Sentiment (OCT) 100.4

Post by TorFX

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