RBA Cuts Rates, BoE Expected to Take Action, Fed Unlikely to Tighten in 2016

Pound Sterling

Investors have been relieved by today’s UK construction PMI for July, which only showed a marginal acceleration in the rate of contraction. Markets had expected a more severe downturn, although the fact that the new score of 45.9 represented the fastest sector contraction since the height of the financial crisis has kept appetite for the Pound weak. The UK currency is still soft overall, however, thanks to several measures of the UK economy released last week that disappointed. GDP was actually better-than-expected, although investors reacted badly to this thanks to fears that the Brexit vote might have reversed recovering economic growth. The Bank of England (BoE) is expected to cut interest rates on Thursday, so the Pound is likely to stay weak.

Euro

A struggling US Dollar is helping the Euro advance today thanks to the negative correlation between the two currencies. There is little Eurozone data or news available, although there is the potential for news regarding either the Italian banking crisis or Greece’s persistent financial troubles to emerge and weaken the common currency. Only the Producer Price Index is released today and will give an indication of whether inflation in the Eurozone looks likely to rise or fall. The data is usually considered low-impact, but thanks to a lack of anything else to go on, investors may give the figures more credence than they usually receive.

US Dollar

After a strong rise yesterday, on the back of cool demand for high-risk assets, the US Dollar is today weakening as previous poor data hits home. The latest ISM Manufacturing index has shown a faster-than-expected slowdown in the US manufacturing sector. The index dropped from 53.2 to 52.6, against expectations of a slip to 53. Combined with last Friday’s disappointing GDP figure, this has severely dented confidence in the US economy and has seen traders pushing their expectations for an interest rate hike back from December to May.

Australian Dollar

The Australian Dollar is currently recovering from an early morning dip in the wake of the latest Reserve Bank of Australia (RBA) monetary policy meeting. As was widely expected, the RBA cut interest rates to a new historic low of 1.50%. This did not overly weaken the ‘Aussie’, however, as markets had already priced-in the potential for a cut. Other poor domestic data has failed to weigh on the Australian Dollar, despite trade figures showing a deficit of -3195 million, rather than the forecast -2000 million.

New Zealand Dollar

A marginally higher 2-year inflation expectation figure from the Reserve Bank of New Zealand’s (RBNZ) latest survey has boosted the New Zealand Dollar today. The third-quarter estimate puts inflation ten basis points higher than the 1.65% growth prediction made during the second quarter. While this is still significantly below the RBNZ’s 2% inflation target, it has at least shown that inflation is moving in the right direction. The results of the latest GlobalDairyTrade auction could undermine ‘Kiwi’ gains should they show a fall in the price of dairy.

Canadian Dollar

The Canadian Dollar has had a tough time of late, with little domestic data to protect it from the weakness in the oil markets. What reports have been released have provided no support, with Friday’s GDP figure showing a stronger-than-expected contraction on the month and slower-than-expected growth on the year. Meanwhile, crude oil has been consistently on the decline, weakening below US$40 per barrel to hit a fifteen-week low. Crude oil is now closer to the bottom of its 52-week price range than it is to the highs achieved in January this year. A positive score from today’s RBC Canadian Manufacturing PMI for July may help to ease the Canadian Dollar’s losses.

Posted by Rewan

Rewan is one of an in-house team of currency analysts working at TorFX, a leading foreign currency broker. In his role Rewan studies the latest currency market movements and writes about the impact of global economics and politics on exchange rates for several online and physical publications.

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