Increasingly Dovish Fed Weighs on US Dollar Demand

Drop in Consumer Confidence Drags on Australian Dollar

Fresh disappointment greeted July’s Westpac consumer confidence index as it declined -4.1% on the month. AUD exchange rates weakened in the wake of this latest underwhelming sentiment indicator, with the Australian economy appearing at increasing risk of a further slowdown. However, the Australian Dollar found some support overnight thanks to a sharp decline in the appeal of the US Dollar amid bets that the Federal Reserve will cut interest rates in July.

If May’s investment lending figure rebounds on the month as forecast this morning the mood towards the Australian Dollar could improve further.

Pound Rallies as UK Growth Betters Forecast

GBP exchange rates benefitted last night as the UK gross domestic product bettered forecasts, clocking in at 0.3% rather than 0.1% in the three months to May. This moderately stronger showing helped to limit bets that the UK could face a recession in the second half of the year. Even so, the upside potential of the Pound was still limited overnight thanks to disappointing manufacturing production data, which stagnated on the year.

This morning’s RICS house price balance may further limit the appeal of the Pound, with investors anticipating another month of decline for the housing market.

Lack of Eurozone Data Limits Euro Potential

Without the support of fresh Eurozone data EUR exchange rates struggled to find much in the way of traction yesterday. Even so, the relative weakness of the US Dollar helped to shore up the Euro, thanks to the negative correlation of the EUR/USD exchange rate. With the Federal Reserve appearing on track to cut interest rates at its July policy meeting the mood towards the single currency improved, in spite of persistent signs of European Central Bank (ECB) dovishness.

The content of the ECB’s June meeting minutes could put the Euro on a weaker footing if policymakers maintain a dovish outlook.

US Dollar Slumps as Fed Chair Signals Interest Rate Cut

Comments from Federal Reserve Chair Jerome Powell helped to drive the US Dollar lower across the board overnight. As Powell strongly hinted that the Fed will move to cut interest rates this month USD exchange rates were left on a downtrend, even though high odds of a move had already been priced in. Some investors even speculated that a 50 point rate cut may be on the cards, adding to the bearish mood of the US Dollar.

Any softening of the consumer price index could see USD exchange rates shedding further ground, even though the measure is not the Fed’s preferred gauge of inflation.

Steady BOC Decision Fails to Boost Canadian Dollar

Even though the Bank of Canada (BOC) left interest rates on hold last night this was not enough to boost the Canadian Dollar. While policymakers acknowledged that the economy had performed better than anticipated in recent months this was largely attributed to temporary factors. This kept the prospect of potential future BOC monetary loosening alive, limiting the strength of CAD exchange rates.

Evidence that the Canadian housing market continued to stall in May could put additional pressure on the Canadian Dollar.

New Zealand Dollar Strengthens in spite of Food Price Index Contraction

Another blow to confidence in the New Zealand outlook came on the back of June’s food price index, which contracted -0.7% on the month. This drop in prices suggests that inflationary pressure remains weak, something which may keep the Reserve Bank of New Zealand (RBNZ) on course to cut interest rates in the near future. However, as market risk appetite strengthened in response to the weaker US Dollar this helped to lift NZD exchange rates.

A rebound in retail card spending may encourage the New Zealand Dollar to make further gains this morning.

Data Releases

July 11th 08:45 NZD Retail Card Spending (MoM) (JUN) 0.7%
July 11th 09:01 GBP RICS House Price Balance (JUN) -12.0%
July 11th 11:30 AUD Investment Lending (MAY) 0.5%
July 11th 21:30 EUR European Central Bank Meeting Minutes (JUN)
July 11th 22:30 CAD New Housing Price Index (YoY) (MAY) 0%
July 11th 22:30 USD Consumer Price Index (YoY) (JUN) 1.6%

Louisa Heath