Weaker UK Inflation Weighs Down Pound Ahead of BoE Rate Decision

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  • Westpac Leading Index Paints Mixed Picture of Australian Economic Outlook – Weaker labour market data could extend AUD losses
  • UK Inflation Slows to 21-Month Low in November – Pound trends lower ahead of BoE rate decision
  • Canadian Dollar Extends Losses After Disappointing Inflation Data – Odds of BOC interest rate hike continue to diminish
  • New Zealand Dollar Softens Ahead of Third Quarter GDP – Steady growth may encourage NZD exchange rate rally

Mixed Leading Index Data Limits Australian Dollar Demand

As the Westpac leading index contracted -0.09% on the month in November this left the Australian Dollar on a weaker footing. Although the overall picture painted by the report proved a little more positive in nature, with the six month annualised growth rate showing a solid uptick, this was not enough to shore up AUD exchange rates. With markets bracing for the latest commentary from Federal Reserve policymakers a general sense of risk aversion limited the appeal of the Australian Dollar further.

AUD exchange rates could come under further pressure this morning if the labour market shows any signs of easing in November.

Pound Trends Lower After UK Inflation Hits 21-Month Low

GBP exchange rates came under fresh pressure as the UK consumer price index eased from 2.4% to 2.3% on the year in November. While forecasts had pointed towards this slowdown in inflationary pressure this still left the Pound trending lower across the board. With inflation at a 21-month low the Bank of England (BoE) has less incentive to raise interest rates, to the disappointment of investors. As the EU also stepped up its contingency planning for the event of a no-deal Brexit this further dampened the appeal of the Pound.

Fresh volatility is likely in store for the Pound tonight in the wake of the BoE’s December policy announcement.

Robust German Price Index Boosts Euro

The latest German producer price index data defied forecasts to avoid a contraction on the month, boosting confidence in the Euro. With inflationary pressure in the Eurozone’s powerhouse economy continuing to pick up the downside bias of EUR exchange rates eased, even though this is unlikely to alter the policy outlook of the European Central Bank (ECB). Confirmation that the European Commission and Italian government had reached an agreement on Italy’s controversial 2019 budget proposal gave investors additional incentive to pile into the single currency.

However, in the absence of fresh Eurozone data today the Euro may struggle to hold onto its gains for long.

US Dollar Softened in Anticipation of Fed Meeting

Ahead of the Federal Open Market Committee (FOMC) policy announcement demand for the US Dollar remained muted. With the Fed under fire from the Trump administration over its willingness to raise interest rates investors were wary of the prospect of a dovish interest rate hike, or potentially no hike at all. A solid rebound in existing home sales on the month failed to give USD exchange rates any particular boost, meanwhile.

An uptick in tonight’s Philadelphia Fed business outlook index may encourage greater confidence in the US Dollar, however.

Sharp Slowdown in Canadian Inflation Weighs on Canadian Dollar

Confidence in the Canadian economy took a fresh blow overnight as November’s consumer price index fell short of forecast, slumping from 2.4% to 1.7% on the year. With the headline inflation rate falling below the Bank of Canada’s (BOC) 2% target once again the case for any imminent monetary tightening diminished. As oil prices remained under pressure the Canadian Dollar fell further out of favour with investors.

If October’s wholesale trade sales data shows a solid rebound on the month, though, this could limit the downside potential of CAD exchange rates tonight.

Rising Consumer Confidence Gives New Zealand Dollar Limited Support

As the fourth quarter Westpac consumer confidence index picked up from 103.5 to 109.1 this offered support to the New Zealand Dollar. However, NZD exchange rates struggled to capitalise on this stronger showing as the general sense of risk appetite deteriorated. Although a dovish Federal Reserve would be a positive development for the risk-sensitive New Zealand Dollar the weaker US Dollar was not enough to boost NZD exchange rates yesterday.

Steady growth in the third quarter gross domestic product may give the New Zealand Dollar a more substantial rallying point, however.

Data Released

December 20th 08:45 NZD Gross Domestic Product (YoY) (3Q) 2.8%
December 20th 11:30 AUD Unemployment Rate (NOV) 5.0%
December 20th 23:00 GBP Bank of England Rate Decision 0.75%
December 21st 00:30 CAD Wholesale Trade Sales (MoM) (OCT) 0.4%
December 21st 00:30 USD Philadelphia Fed Business Outlook (DEC) 15.5

Post by TorFX

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