Weaker-Than-Forecast UK Inflation Prompts Pound Slump

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  • Disappointing Leading Index Limits Australian Dollar Appeal – AUD vulnerable to weaker labour market data
  • Sharper Slowdown in UK Inflation Drags Down GBP Exchange Rates – Odds of BoE interest rate hike diminish
  • US Dollar Strengthened in Anticipation of Fed Minutes – Investors dismiss soft US housing data
  • Canadian Dollar Trends Lower as Manufacturing Sales Contract – Confidence in domestic economy continues to weaken

Signs of Weakening Growth Weigh on Australian Dollar

As September’s leading index slumped on the month this left the Australian Dollar on a generally weaker footing against its rivals. This fresh decline in the leading index points towards
a softer economic outlook, raising the risk of disappointing third quarter growth data. AUD exchange rates struggled to find any particular traction in the wake of the data, especially as market risk aversion started to pick up ahead of the release of the latest Federal Reserve meeting minutes.

The Australian Dollar may come under further pressure this morning if September’s labour market data fails to impress.

Pound Slips After UK Inflation Falls Short of Forecast

The headline UK consumer price index proved weaker further than forecast in September, easing from 2.7% to 2.4% on the year. As this pushes inflation closer towards the Bank of England’s (BoE) 2% target this weaker showing diminished the odds of policymakers voting to raise interest rates in the near future. With the chances of a no-deal Brexit also rising, thanks to disagreement over the Irish border, GBP exchange rates were left to trend lower.

An uptick in September’s retail sales figures may give the Pound a rallying point, however, if confidence in the outlook of the UK economy improves.

Confirmation of Higher Eurozone Inflation Unable to Boost Euro Demand

While the finalised Eurozone consumer price index for September confirmed an uptick in inflation this was not enough to boost EUR exchange rates. Even though annual inflation has risen above the European Central Bank’s (ECB) target at 2.1% investors still see little chance of interest rates rising in the months ahead. A monthly contraction in Eurozone construction output added to the bearishness of the single currency, highlighting the weaker economic growth of the currency union.

September’s German wholesale price index could shore up the Euro if the data points towards a further increase in price pressures.

Weak Housing Data Failed to Prevent US Dollar Rally

A heightening sense of risk aversion ahead of the publication of the Federal Open Market Committee’s (FOMC) September meeting minutes offered a boost to the US Dollar. With investors bracing for another hawkish set of minutes the appeal of more risk-sensitive currencies diminished. This helped to limit the impact of disappointing US housing starts and building permits figures, which both showed contractions on the month. While this dampened confidence in the strength of the US economy, though, this was not enough to weigh down USD exchange rates.

As forecasts point towards a modest improvement in tonight’s leading index the US Dollar could find further upside momentum.

Canadian Dollar Under Pressure After Underwhelming Manufacturing Sales

Although August’s Canadian manufacturing sales showed a smaller contraction than forecast this was not enough to prevent CAD exchange rates trending lower overnight. As sales failed to pick up on the month confidence in the underlying strength of the domestic economy weakened. This undermined market hopes that the Bank of Canada (BOC) could raise interest rates again in the near future, giving investors less incentive to favour the Canadian Dollar.

A positive ADP payrolls report may encourage renewed CAD exchange rate gains tonight, however.

New Zealand Dollar Continues to Benefit From Diminished Interest Rate Cut Odds

Reduced odds of a Reserve Bank of New Zealand (RBNZ) interest rate cut continued to support the New Zealand Dollar yesterday. Even in the absence of fresh domestic data NZD exchange rates pushed higher, in spite of anticipation building for the latest Fed meeting minutes. As investors now expect a more limited policy divergence between the Fed and RBNZ the mood towards the ‘Kiwi’ remained positive.

Even so, if market risk appetite fades further this could drag the New Zealand Dollar down against its rivals.

Data Released

October 18th 11:30 AUD Unemployment Rate (SEP) 5.3%
October 18th 17:00 EUR German Wholesale Price Index (YoY) (SEP) 
October 18th 19:30 GBP Retail Sales Ex Auto Fuel (YoY) (SEP) 3.8%
October 18th 23:30 CAD ADP Payrolls Report (SEP) 
October 19th 01:00 USD Leading Index (SEP) 0.5%

Post by TorFX

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