BOE Raises Rates in Face of Expected Recession

AUD

The AUD opens relatively flat or down against the majority currency pairs this morning with the exception of the USD. Asian equities closed predominantly higher on Thursday, with the Hang Seng soaring 2.1%, despite Chinese military commencing drills around Taiwan which would usually create jitters for risk assets. The ASX finished flat with a rise in tech stocks countered by a drag in the energy sector partially a result of a dip in oil prices which finished below $90/barrel for the first time since the Ukrainian invasion. The RBA’s quarterly statement on Monetary Policy is due today and will contain upgraded inflation forecasts. Markets are expecting the Bank to assume an increased cash rate profile than in May, which, in conjunction with a weakened global growth outlook, should help to reduce the growth forecast. Given that backdrop, we are likely to see forecasted increases in unemployment.

USD

The AUDUSD opens at 0.6963, having climbed steadily during the session, moving off lows of 0.6935 early in the day to reach 0.6988 highs. Demand is now expected ahead of 0.6850 while topside resistance resides around 0.7030/40. To US data overnight, and Unemployment Claims were a little lower than forecasted, being counteracted by a favorable Trade Balance relative to expectations. A subdued session on Wall St, with the S&P 500 and Dow Jones having finished slightly in the red and the NASDAQ up 0.4%. The much-anticipated US Non-Farm Employment Report for July will be released tonight. This report will be scrutinized for any indication of deterioration, as the US labour market has been one of few positives for growth in 2022. The general consensus predicts an abrupt slowing in payroll growth to +250k, and the Unemployment Rate itself is expected to remain stable at 3.6%. 

EUR

The AUDEUR peaked at 0.6867 overnight before falling away sharply, losing over 1% to open this morning lower at 0.6794. European equities closed higher on the day and the data showed monthly German Factory Orders were down, although a little above expectation. The ECB suggested global energy prices will remain high in the near term and at the same, the economic activity has contracted “in key advanced economies since the last Governing Council meeting in June.” Looking ahead and today we see monthly German, French and Italian Industrial Production data, quarterly French Preliminary Private Payrolls and the French Trade Balance.

GBP

The AUDGBP opens slightly higher at 0.5725, after a short-lived rally to 0.5775 overnight in the aftermath of the BOE’s 50bp rate hike. This represents the Bank’s largest single rate hike since 1995. The Monetary Policy Committee has left the door open to “forcefully” raise hikes again, even though the economy is forecasted to shrink 2.1% by the end of 2023. Although the hike was on expectation, the paired commentary lead to sentiment taking a hit and thus GBP weakness. This is a theme we have noticed recently after the US Fed's and the RBA's equivalent meetings. BOE’s Governor Bailey stated “The worst thing that can happen is that inflation becomes embedded. That’s what worries me”. The Bank was forced to increase its yearly inflation forecast to a whopping 13.3% for the fourth quarter, with expectations at “near double digits” in a year’s time. The BOE also says that recession is coming and expects it last for 5 quarters. BOE Governor Bailey maintains the Pound's drop is ‘not a crisis for now’ and that the Bank’s target is still to reign inflation in to 2%. They've got some work to do.

NZD

AUD drifts slowly lower here, opening at 1.1053 this morning in lacklustre conditions. The absence of Kiwi data will cease on Monday when we receive Inflation Expectations for Q3 which are expected at 3.3%. RBNZ will be watching these numbers closely.