Australian Dollar Benefits as Rising Inflation Reduces RBA Dovishness

Higher Inflation Rate Buoys Australian Dollar

The mood towards the Australian Dollar improved in the wake of the third quarter consumer price index data as inflationary pressure showed fresh signs of picking up. As the headline inflation rate strengthened from 1.6% to 1.7% this encouraged bets that the Reserve Bank of Australia (RBA) will resist any monetary loosening in the near future. However, the bullishness of AUD exchange rates faded overnight thanks to the decreasing likelihood of an imminent US-China trade agreement.

Any weakening in private sector credit growth could put additional pressure on the Australian Dollar this morning.

Pound Struggles as Markets Brace for General Election

With the UK on track for its third general election in four years support for the Pound proved largely muted. As a sense of political uncertainty is now set to hang over the UK for the remainder of the year investors saw little reason to favour the Pound over its rivals. Another month of weakness from the BRC shop price index added to the bearish mood, leaving GBP exchange rates on a softer footing last night.

A fresh deterioration in the GfK consumer confidence index for October may drag the Pound lower across the board.

Weaker German Inflation Limits Euro Appeal

Germany’s headline inflation rate weakened in line with market expectations overnight, dipping from 1.2% to 1.1% on the year. This decline is likely to underline the dovish outlook of the European Central Bank (ECB), raising the risk of further monetary loosening coming before the end of the year. Even so, an unexpected uptick in the monthly inflation rate ultimately helped to limit the data’s negative impact on the Euro.

If the Eurozone consumer price index shows a similar deterioration this could see the single currency shedding further ground.

US Dollar Muted as Political Pressures on Fed Increase

As markets continued to brace for the Federal Reserve’s October policy announcement the US Dollar struggled to find any particular traction against its rivals. Although the abrupt cancellation of the APEC political summit poured cold water over the prospect of an imminent US-China trade agreement this failed to shore up USD exchange rates. With the Fed still under considerable political pressure to pursue an aggressive easing strategy support for the US Dollar proved limited.

Any weakening of the latest personal consumption expenditure data may add to the case for Fed dovishness, given that the measure remains the central bank’s preferred gauge of inflation.

Signs of BOC Negativity Weigh Down Canadian Dollar

Although the Bank of Canada (BOC) left interest rates on hold at its October policy meeting this failed to prevent CAD exchange rates trending lower. Investors were discouraged by the more negative tone of the Bank’s accompanying comments, which suggested a weaker level of confidence in the economic outlook. With the BOC looking less insulated from the possibility of looser monetary policy the Canadian Dollar stumbled.

However, CAD exchange rates could find a foothold if tonight’s gross domestic product picks up on the month as forecast.

Lower Odds of US-China Trade Breakthrough Limit New Zealand Dollar Support

As Chile abruptly called off the Asia-Pacific Economic Cooperation (APEC) summit the likelihood of an imminent US-China trade agreement diminished sharply. The resulting increase in market risk aversion put a dampener on the New Zealand Dollar, diminishing its appeal.

If the ANZ business confidence index falls deeper into negative territory on the month this could drive a fresh decline for NZD exchange rates.

Data Releases

October 31st 10:00 NZD ANZ Business Confidence (OCT)
October 31st 10:01 GBP GfK Consumer Confidence Index (OCT) -13
October 31st 10:30 AUD Private Sector Credit (YoY) (SEP) 2.7%
October 31st 20:00 EUR Eurozone Consumer Price Index (YoY) (OCT) 0.7%
October 31st 22:30 CAD Gross Domestic Product (MoM) (AUG) 0.0%
October 31st 22:30 USD Personal Consumption Expenditure Core (YoY) (SEP) 1.7%

Louisa Heath