Germany tanks the euroBy Vincent-Frédéric Mivelaz
Disappointing inflation rates in the EU – especially Germany – are pushing the euro down. EUR/USD’s strong decline continues, approaching hourly support at 1.2028 (11 January low).
Latest German inflation data supports the European Central Bank’s contention last Thursday that the Eurozone economy is slowing. April inflation remained stable at 1.60% (consensus: 1.50%) while core inflation eased to 1.40% (prior: 1.50%), due to declines in services and manufacturing. Still, supported historically low unemployment (March: 5.30%), high consumer confidence and wage growth of 4+% (Eurozone: 2% range), German inflation is expected to accelerate in the near term. Italian and Portuguese inflation also disappointed in April, and we expect Eurozone March inflation published on Thursday to dip below the 1%, probably to 0.90%. We remain confident this inflation will not kill expansion in the EU.
Australia keeps rates steadyBy Arnaud Masset
As expected, the Reserve Bank of Australia held its Cash Rate Target at 1.5%. Volatility increased temporarily as investors tried to read between the lines; however, the Aussie quickly stabilised and even eased slightly as the greenback rose across the board. AUD/USD slid to 0.7520 during the European morning as the dollar kept pushing higher. After increasing 0.35% on Monday, the dollar index rose 0.15%.
RBA maintained its well-known caution, especially regarding FX, saying “on a trade-weighted basis [the Australian dollar] remains within the range that it has been in over the past two years.” It added: “An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”. Nevertheless, the bank was optimistic regarding growth remained confident that China will stay solid. The bank expects growth will average “a bit above 3% in 2018 and 2019” as non-mining business investment increases. Overall, RBA seems happy and sees no reason for change now. AUD/USD will most be driven by the US dollar in the near term, so we expect further downside.