Heightened US-Iran Tensions Push Down Australian Dollar
Risk appetite collapsed as news broke that a US airstrike had killed key Iranian general Qassem Suleimani, prompting a sharp escalation in tensions between the two nations. As markets saw an increased risk of conflict within the Middle East as a result of the move this weighed heavily on risk-sensitive assets such as the Australian Dollar. This fresh threat to the global growth outlook saw AUD exchange rates trending lower heading into the weekend.
Another weak manufacturing PMI reading could see the Australian Dollar shedding further ground this morning.
Worsening UK Construction Decline Drags on Pound
As the UK construction PMI slipped deeper into a state of contraction this left the Pound with little in the way of support. Although the construction sector contributes relatively little to the UK gross domestic product this latest sign of a slowdown was enough to weigh on GBP exchange rates. Investors were also disappointed by the slowing in consumer credit growth seen in November, which suggests a greater level of caution among households.
Further weakness may be in store for the Pound this evening unless the finalised UK services PMI can deliver a positive surprise.
Rising German Inflation Shores up Euro
December’s German consumer price index report proved stronger than forecast, with the headline inflation rate picking up from 1.1% to 1.5%. This uptick encouraged the Euro to hold onto a positive footing ahead of the weekend as markets bet on the prospect of a sustained improvement in German inflation. While this still falls some way short of the European Central Bank’s (ECB) 2% target the data indicates that inflation is moving in the right direction, reducing the case for further monetary loosening.
Confirmation that the Eurozone service sector remained resilient in December could help to boost EUR exchange rates further.
US Dollar Shakes off Fed Meeting Minute Jitters
Anticipation ahead of the release of the Federal Open Market Committee’s (FOMC) December meeting minutes was not enough to drag the US Dollar down during Friday’s European session. USD exchange rates instead benefitted from the wide deterioration in market sentiment as investors reacted to the dramatic escalation in US-Iran tensions. This uptick in safe-haven demand also helped to limit the impact of a disappointing US manufacturing PMI.
As long as the corresponding services PMI confirms an acceleration in growth this could offer the US Dollar further support tonight.
Surge in Oil Prices Carries Canadian Dollar Higher
Oil prices surged sharply higher ahead of the weekend as heightened US-Iran tensions stoked fears of supply disruption in the region. Brent crude leapt 4.5% to break back above the US$69 per barrel mark, pushing the commodity-correlated Canadian Dollar higher across the board. Even though the risk of fresh conflict in the Middle East fuelled a general sense of market risk aversion this failed to put a dampener on CAD exchange rates.
With forecasts pointing towards a monthly contraction in the Canadian producer price index, though, the Canadian Dollar may struggle to hold onto its gains for long.
Geopolitical Tensions Weigh Heavily on New Zealand Dollar
The mood towards the New Zealand Dollar soured as markets absorbed the implications of US airstrikes killing a key Iranian general. As risk appetite weakened sharply in response to the news this left NZD exchange rates on a weaker footing, with investors spooked by the sudden escalation in US-Iran tensions.
As long as geopolitical tensions remain heightened the potential for a New Zealand Dollar recovery looks limited.
Data Releases
January 6th 07:30 AUD Manufacturing PMI (DEC) 48.8
January 6th 19:00 EUR Eurozone Services PMI (DEC F) 52.4
January 6th 19:30 GBP Services PMI (DEC F) 49
January 6th 23:30 CAD Producer Price Index (MoM) (NOV) -0.5%
January 7th 00:45 USD Services PMI (DEC F) 52.2