UK Inflation Within a Whisker of BoE Target | Daily FX Commentary

• RBA minutes provide little guidance of future interest rate movements;
• UK inflation data approaches BoE target, reigniting rate hike speculation;
• Greenback supported as Yellen delivers balanced reading on US economy.

The release of RBA minutes yesterday only confirmed the expected, which is that interest rates are to remain at record lows in a bid to stimulate demand. As minutes were largely viewed to have a neutral tone, the Aussie dollar gained support. Markets appear to be content with the fact that the RBA cannot cut rates as inflation continues to run at 3%, the top end of the of inflation target, also reporting that housing inflation seems to have slowed in recent months. The local unit has struggled to hold onto $0.94 as markets await Q2 CPI data next week and Chinese GDP today.

Data from the UK overnight surprised to the upside with Sterling making solid gains across the board. CPI for June was expected to read 1.6% but quashed expectations reading 1.9% and closing in on the ever important 2% inflation target set by the Bank of England. Pound gains were limited overnight against a well-supported US dollar but still managed to reach highs of $1.7191 and very close to 6-year highs. In recent trading sessions we have seen long Sterling bets all out of favour with hedge funds as data has failed to meet high expectations, but what we saw yesterday is that Mark Carney may be correct in his guidance that rates could rise sooner than anticipated.

In the US, any trace of positive sentiment seen in Janet Yellen’s testimony to Congress was always going to spur demand for the greenback, as many believe that a rate hike is on the horizon. In what was overall a balanced reading of the US economy, Yellen did warn markets that there remains considerable uncertainty about the economic outlook, however made no reference to whether that would demand increased interest rates in the near, or longer term. Citing a vastly improved labour market and how that could determine future rate movements, markets viewed the testimony as an improvement on last months, however there is no question that the outlook for US rates is largely reliant on continued strength in economic data.

[B]Tom Williams
Sales Trader[/B]