• Aussie collapsed overnight as US economy bounces back to life in Q2;
• Greenback trades a 4-month high as Q2 GDP quashed expectations;
• Pound continues to slide in the absence of domestic data.
The Aussie dollar met resistance throughout much of yesterday’s sessions with losses extending overnight after forecast beating data from the US. The Aussie dollar was sold down to $0.93, a level where we have consistently seen support in the local unit, needless to say that losses were only limited by yet another dovish statement from the FOMC. Local building approvals data at 11:30 AEST will test Aussie dollar support where we are looking for YoY domestic building permits granted to have risen by 23.3% in June. Any shortfall in forecasts may trigger fears that the RBA will maintain neutral monetary policy bias for longer, or perhaps loosen policy further if we see a slowdown in inflation towards the end of the year.
Highly anticipated GDP data from the US overnight failed to disappoint, bouncing back from the weather related lull in growth seen in the first quarter. The greenback was marginally softer after ADP employment data failed to meet expectations, however this reading is notoriously volatile and not necessarily a reflection of non-farm payrolls due for release on Friday. Annualized GDP expanded 4% in the second quarter and was exactly what the market needed to see to confirm that the US economy is on a path of recovery. If it wasn’t for yet another dovish FOMC statement which cites ‘significant slack in the labour market’, we would have expected to see the greenback trade higher overnight. Despite some late strength in the EURUSD pair overnight, we would expect that $1.34 was a key turning point and the Euro will remain under pressure as Fed policy will inevitably favour the greenback against an uncertain European economic outlook.
Direction of the pound was largely dictated by overseas data overnight, suffering in the wake of US data. Sterling has steamed ahead of all major peers over the past year as the Bank of England looked to be moving closer to raising rates, underpinned by economic data. As Carney’s messages on policy adjustments remain mixed and wage growth trails inflation, institutional investors continue to reduce long positions in the UK currency and struggle to find conviction that Sterling can reach new highs, despite the probability of a rate hike in the first quarter of next year.
[B]Tom Williams
Sales Trader[/B]