RBA Neutral Bias Confirmed by Aussie CPI | Go Markets Daily FX Commentary

• Australian inflation reads at the top end of RBA ‘comfort zone’;
• RBNZ raised interest rates a further 25 basis points but signalled rates freeze;
• Sterling dips as Bank of England minutes read on the dovish side;
• Weaker EU data discarded as markets await string of EU and US data this evening.

Local markets had expected an uplift in Aussie CPI from the first quarter and the data didn’t disappoint. Q2 CPI read 3% vs 2.9% in Q1, with the trimmed mean gauge of inflation reading 0.8%, 0.2% ahead of forecasts and caused the Aussie dollar to rally through $0.94. It is important to note the significance of such inflationary pressure as it is delivered at a time when economists remain split over whether the RBA will raise, or perhaps cut interest rates a further 25 basis points. Whilst the results were not shocking, they have confirmed that the RBA is likely to retain a neutral stance for some time, hence the Aussie climbing to two week highs.

News this morning that the RBNZ raised rates by a further 25 basis points was widely expected by the market and there was always the chance that the Central Bank would pause rate movements until the end of the year. However, noting that inflation remains weak and the Kiwi Dollar trades at ‘unjustified and unsustainable’ levels, the Kiwi inevitably fell. If the Central Bank see a weakened currency by the end of the year, we may see further rate hikes commence in December.

Sterling was weaker across the board overnight as minutes from the Bank of England suggested that weakness in wage inflation throughout the UK economy could lead to a delay in rate hike. Despite a recent uplift in inflation, which now stands within a whisker of the BoE target, data last week showed that wage growth remains very weak. Combined with a slowdown in house price acceleration in recent weeks, speculation mounts that the Central Bank may delay a change in monetary policy until early next year, hence six consecutive days of losses against the greenback.

Geopolitical events around the globe remain the key catalyst for Euro and Greenback direction, markets discarding weaker consumer confidence data from the Eurozone overnight. EURUSD traded within a tight range for much of yesterday’s sessions as markets await EU manufacturing data, US jobless claims and US new home sales data this evening. In light of recent data from the US and Eurozone, we could see EURUSD continue on a downward trajectory as the ECB attempts to weaken the Euro and stimulate growth, with the Federal Reserve debating a rate hike.

[B]Tom Williams
Sales Trader[/B]