Euro Slumps as Italian Economy Slips Back into Recession

Stronger Export Price Index Boosts Australian Dollar

A surprise uptick in the fourth quarter export price index helped to shore up the Australian Dollar yesterday. The risk-sensitive AUD also took encouragement from the latest Chinese manufacturing PMI, which saw a modest improvement on the month. Even though the sector remains in a state of contraction the acceleration from 49.4 to 49.5 was still enough to increase market risk appetite.

However, any slowdown in the latest producer price index data could drag the Australian Dollar down as the odds of a Reserve Bank of Australia (RBA) interest rate hike diminish.

Slowing Housing Market Dampens Appeal of Pound

In another disappointing turn for the UK economy house price growth slowed to its lowest level since February 2013 at the start of the year. With Brexit-based anxiety weighing heavily on domestic sentiment confidence in the economic outlook naturally diminished. As markets continue to lack clarity over the likely shape of the UK’s future relationship with the EU the appeal of the Pound remains relatively muted.

Unless the UK manufacturing PMI surprises to the upside GBP exchange rates could struggle to find much in the way of support today.

Italian Recession Dents Euro Demand

The Euro came under pressure last night as Italy slipped back into recession for the third time in a decade. As the gross domestic product contracted -0.2% in the fourth quarter of 2018 the Italian economy rounded off another year of underwhelming growth. Coupled with a muted economic performance from the overall Eurozone GDP, giving the European Central Bank (ECB) greater incentive to leave interest rates on hold, this left the single currency on a weaker footing.

Confirmation that Eurozone inflation eased further in January may prompt additional Euro selling this evening.

Cautious Fed Message Weighs Heavily on US Dollar Exchange Rates

After the Federal Reserve adopted a significantly more cautious tone at its January policy meeting than markets had expected the mood towards the US Dollar soured. With Fed policymakers looking set to leave monetary policy on hold for longer USD exchange rates struggled to find much in the way of support. An unexpectedly sharp deterioration in January’s Chicago PMI added to the US Dollar’s bearishness overnight.

Tonight’s US non-farm payrolls report may offer USD exchange rates a boost, however, if the labour market shows fresh signs of tightening.

Canadian Dollar Trends Lower as Growth Contracts

November’s Canadian gross domestic product data did not paint an encouraging picture, with growth contracting -0.1% on the month. This underwhelming performance saw the Canadian Dollar trending lower as confidence in the underlying health of the domestic economy faded. Even though oil markets remained in a positive mood, thanks to US sanctions against Venezuela, this was not enough to prevent CAD exchange rates losing ground.

A solid performance from the latest Canadian manufacturing PMI could encourage the Canadian Dollar to pick up, however.

Risk Appetite Shores up New Zealand Dollar

The general improvement in market risk appetite fuelled New Zealand Dollar gains yesterday, even in the absence of fresh domestic data. With the Chinese economy showing signs of picking up and with the Federal Reserve no longer on a monetary tightening bias NZD exchange rates were encouraged to push higher. While global trade tensions persist this failed to prevent this latest bout of New Zealand Dollar strength.

Any decline in the ANZ consumer confidence index, though, may see NZD exchange rates falter once again.

Data Releases

February 1st 08:00 NZD ANZ Consumer Confidence Index (JAN)
February 1st 11:30 AUD Producer Price Index (YoY) (4Q) 1.9%
February 1st 20:30 GBP Manufacturing PMI (JAN) 53.5
February 1st 21:00 EUR Eurozone Consumer Price Index (YoY) (JAN) 1.4%
February 2nd 00:30 USD Change in Non-Farm Payrolls (JAN) 165,000
February 2nd 01:30 CAD Manufacturing PMI (JAN) 53.9

Louisa Heath

louisa.heath@torfx.com


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