ECB Confirms Rate Hike Cycle is Imminent
AUD
The AUD performed poorly overnight against its counterparts except for the US dollar. Following Friday's modest downtick, the AUDUSD pair attracted fresh buying on the first day of a new week drawing support from the Reserve Bank of Australia's hawkish signal that a bigger interest rate hike is still possible in June amid the upside risks to inflation. Adding to this, the risk-on impulse undermined the safe-haven US dollar and further benefitted the risk-sensitive Aussie.. Asian equities were mixed on Monday, with the Hang Seng down 1.4% while the Nikkei was 1% higher. The ASX rose 0.05%, led by the miners which benefited from the rise in iron ore prices. Investors turned optimistic amid hopes that loosening COVID-19 lockdowns in China could boost the global economy. This was evident from a generally positive tone around the equity markets, which drove flows away from traditional safe-haven assets and dragged the USD to a fresh monthly low. That said, hawkish Fed expectations could help limit any deeper USD losses. Traders will look forward to the release of the flash PMI prints from Australia today for some meaningful impetus.
USD
AUDUSD performed well testing the 0.7127 level multiple times – a two and a half week high, before settling back down just below the 0.7100 level to trade at 0.7095 this morning. Biden launched a new trade deal with 12 Indo-Pacific nations, who will join the US in an economic initiative to counter China’s influence in the region. Together with the US, the 12 countries including Australia, Japan and South Korea account for 40% of global GDP. The US 10-year moved higher to 2.82% while oil also edged higher to $111 a barrel. Wall St remained firm into the close with the Dow Jones and the S&P 500 closing the session +2.0%, while the NASDAQ finished 1.5%. The markets have fully priced in a 50 bps rate hike over the next two meetings, though expect that the US central bank would need to take more drastic action to bring inflation under control. This, along with an uptick in the US Treasury bond yields, supports prospects for the emergence of some USD buying, which, in turn, should cap the AUDUSD pair’s gains, at least for now. In the absence of any major market-moving economic releases from the US, the broader risk sentiment and the US bond yields will influence the USD price dynamics. Today will see the release of flash PMI data for the US also, however the focus will remain on Thursday evening’s release of the FOMC meeting minutes.
EUR
AUDEUR trades somewhat lower this morning, reaching one-week highs of 0.6715 yesterday afternoon before trickling back down to trade at 0.6638 at time of writing. The Euro bounced higher after Christine Lagarde said the ECB is likely to lift its main policy rate back to zero by the end of September, ending negative interest rates within months. This would imply two consecutive rate hikes of 25 bps and could open the door to a bout of prolonged EUR strength. European equities performed well, with the DAX and CAC gaining 1.4% and 1.2% respectively. With ECB policy on course to tighten, the only impediment to a stronger EUR is the threat of a natural gas shut-off. German ifo Business Climate data was released yesterday, coming back at 93.0 above expectations of 91.5. Today in data out of Europe, Flash Services PMI data will be released today.
GBP
AUDGBP was slightly worse off this morning, having touched one-week highs of 0.5667, coming back down to trade at 0.5636 this morning. In UK equities, the FTSE performed strongly gaining 1.7%. An absent UK economic docket left the Bank of England’s (BoE) Governor Andrew Bailey as the catalyst for the day and sounded very hawkish on the growth of the economy which aligned to most MPC members. He said that the central bank is ready to hike rates if needed and added that policymakers can and must take actions needed to return inflation to target over a period that avoids unnecessary volatility. Bailey said he rejected the argument that the BoE’s response let demand out of hand, thus stoking inflation.
NZD
AUDNZD trades marginally lower this morning, touching 3 week lows of 1.0951, raising back up to trade at 1.0991. This morning, Core Retail Sales q/q came in at 0.0%, below expectations of 0.4%. Retail Sales q/q came in at -0.5%, below expectations of 0.3%. Tomorrow a busy day on the economic docket for New Zealand with all eyes on the Cash Rate, RBNZ Monetary Policy Statement, RBNZ Rate Statement, and RBNZ Press Conference. The market expects the RBNZ to raise interest rates by 50bps, we'll find out at midday tomorrow...