RBA lowers rate rise expectations

Currencies Direct April 23rd 2014 - 2 minute read

The Aussie dollar fell overnight post-Q1 inflation which came in short of expectations and reducing the likelihood of an RBA interest rate hike. The year-on-year inflation rate recorded at 2.9%, falling short of the 3.2% reading forecast by economists ahead of the release. Although the RBA has advocated a "period of stability" on benchmark borrowing costs in recent policy meetings, investors have been busy wondering on what the next move will be. Within that situation, softer price growth readings weaken the apparent possibility of a rise when the standstill ends, eroding yield-based support for the Aussie and sending the currency lower.

Meanwhile, April's initial set of Eurozone PMI figures headlines the calendar in European hours. Overall, forecasts point to a slight slowdown in manufacturing and sector growth compared with March, with the region-wide Composite PMI gauge hitting the lowest level in three months at 53.0. Data from the Eurozone has been underperforming consistently relative to forecasts since late January, with a Citigroup gauge measuring the gap between economists' estimates and realized outcomes now at its most dismal level since ten months. This suggests analysts are underestimating the degree of malaise in the currency bloc, opening the door for downside surprises on today's results. Slowing economic activity typically puts downward pressure on price growth, intensifying the Eurozone's continuing disinflation problem and advancing the probability of additional ECB stimulus in the minds of investors.

Finally, Minutes from April's Bank of England policy meeting are similarly on tap. A steep slide in the inflation rate argues that there remains a long way to go before space capacity – the focal point of BOE forward guidance since February – is sufficiently drawn down to trigger tightening. That suggests the Minutes document will contain little besides rhetoric reinforcing an amply priced-in status quo, offering little impetus for Sterling volatility.

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