Lowered US and UK Rate Hike Expectations Favour Aussie Dollar | Daily FX Commentary

• Aussie dollar closes the week above $0.93 despite softer local and Chinese data;
• Sterling records longest losing run since 2010 as BoE focus on weak wage inflation;
• US retail sales and missed jobless claims forecasts weigh on Greenback ahead of Jackson Hole;
• Pressure mounts on the ECB to stimulate economy as growth stagnated in Q2.

The Aussie dollar has managed to recoup almost all of the losses that were a result of weak unemployment data and subsequent lowered growth and inflation forecasts. Heightened consumer confidence and business sentiment somewhat supported the Aussie throughout the week, the local unit refusing to succumb to selling pressure in the face of weakened Chinese industrial output and generally buoyed by a moderately weaker greenback. There is a sense that the threat of UK and US central banks hiking rates in the short term has been lifted, the Bank of England and Federal Reserve remaining cautious of slack in labour markets and this has boded well for the high yielding Aussie in recent trading sessions.

The Bank of England’s surprisingly downbeat inflation report last week led to a Sterling sell-off across the board, the pound recording its worst performance since 2010. Mark Carney addressed concerns of weaker wage inflation and its significance in policy adjustments whilst reaffirming the Bank of England’s initial opinion that there is no rush to raise interest rates and any hike would be gradual and limited. Carney’s mixed messages on monetary policy has led to confusion in currency markets, headline data has consistently beat the Banks original forecasts yet the MPC are still of the opinion that rates should remain on hold for longer. Comments over the weekend have once again demonstrated inconsistency in the Central Banks economic outlook as Carney revealed that there is still a chance rates could rise prior to an uplift in wage growth.

Highly anticipated retail sales data from the US last week led to a broadly weaker greenback as consumers reigned in spending during July in signs of slack in labour markets. An uplift in weekly jobless claims later in the week saw the US dollar remain under pressure, however the weekly data is notoriously volatile and markets tend to focus more on the monthly average. There is little doubt that a US economic recovery remains broadly on track, however labour market concerns have led to speculation that the Fed will sit on their hands for longer despite approaching the end of their bond buying programme in October. The market will likely get more clarity from the upcoming Jackson Hole conference where Central Bankers are due to deliver speeches this week.

The outlook for the Eurozone economy seems to have gone from bad to worse as growth unexpectedly stagnated in the second quarter and questions are being asked as to how the ECB intends to react. GDP data from the Eurozone’s two largest economies Germany and France contributed to the EU’s economy recording the lowest growth in 6 months. Combined with escalating tension between Ukraine and Russia over the weekend, the Euro looks set for another bumpy week as Mario Draghi is likely to cite the risk of such tensions on an already fragile economy when he speaks at this week’s Jackson Hole conference.

[B]Tom Williams
Currency Analyst[/B]