RBA’s Inflation Outlook to Drive A$ | Go Markets Daily FX Commentary

• Aussie dollar breaks higher on weaker greenback and improved sentiment;
• UK manufacturing data encourages Sterling to bounce from lows against greenback;
• Euro weaker against greenback ahead of ECB rate decision on Thursday.

The Aussie dollar has been somewhat subdued against its US counterpart over the last week as the greenback has soared higher. Encouraged by a recovery in US equity markets as geopolitical sentiment lifted, the Aussie gained some 30 points against the greenback throughout the overnight session and ahead of the RBA’s rate decision this afternoon. Little can be expected from the RBA meeting today, however any change in language will be crucial in understanding the Central Bank’s stance on monetary policy. A suggestion of a ‘period of stability’ in interest rates was made at the last meeting, confirming the RBA’s neutral bias on policy and thus supporting the local unit. The RBA now has a clearer picture on inflation after last month’s CPI data and comments of the inflationary outlook will be key to movements in the Aussie today.

There was no immediate reaction to improved construction PMI data from the UK overnight as markets still remain cautious of the pound at current levels. Still, combined with weakness in the US dollar overnight, cable traded higher bouncing from lows of $1.6813 overnight. Data from the UK has remained solid in recent weeks but the pound has suffered due to the high expectations of a rate hike and it seems that slowing property prices have burst the bubble. However, Thursday’s interest rate decision could be the first meeting that we see some MPC members vote for a rate hike and if this is the case, we could see a turn of fortunes for the UK currency.

Aside from changes in monetary policy, geopolitical events have contributed to the demise of the Euro in recent weeks as sanctions on Russia are seen to threaten the Eurozone’s economic recovery. Cuts in growth forecasts for the Eurozone and falling inflation have seen the currency trade at 8-month lows against the greenback overnight ahead of the ECB’s rate decision later in the week. The fallout from Friday’s softer than expected US jobs report saw the greenback trade lower against most counterparts yesterday, however increased risk flow did not make its way toward the Euro as a dovish ECB is seen as an inevitable outcome of Thursday’s meetings.

[B]Tom Williams
Sales Trader[/B]