Market Drivers May 12, 2016

Dollar gains on Aussie and yen
All eye on GBP
Nikkei 0.41% Dax 0.87%
Oil $46/bbl
Gold $1268/oz.

Europe and Asia:
AUD Consumer Inflation expectations 3.2% vs. 3.6%

North America:
GBP Inflation Report 7:00
GBP BOE Vote 7:00
USD Weekly Jobless 8:30

Another quiet night of trade with EUR/USD remaining comatose around the 1.1400 level but the greenback gaining ground against the Aussie and the yen in Asian and early European dealing.

The Aussie tumbled all the way to .7320 before finally stabilizing and finding some support after Consumer Inflation Expectations revealed a drop to 3.2% from 3.6% the period prior. Inflation expectations and rate forecasts have continued to drift lower ever since the RBA cut its benchmark rate below 2% with some analysts now calling for further cuts as the year progresses.

That change in sentiment has weighed heavy on AUD/USD and the pair is down nearly 500 points off its highs as markets now see a further compression in yields between AU and US bonds. The pair will no doubt will also be sensitive to any movements in the CNY/USD exchange rate which has weakened over the past month as well.

Meanwhile USD/JPY continues to find support above the 108.00 level with Japanese banks reported buyers in Asia today as they drove the pair towards the 109.00 figure. With very little data out of the US this week, the pair continues to hold its ground, but 110.00 is proving to be formidable resistance for the time being.

The key focus in today’s session will be cable, as UK releases its Inflation Report at 1100 GMT and Governor Carney holds a presser at 1130. Given the deterioration in UK economic data, the inflation forecast will likely be lowered and the BOE has already said that they will increase liquidity ahead of the referendum on June 23rd. The shocker for the market however would be if any of the MPC members voted for a rate cut given the slowdown in UK economy.

Cable has been relatively steady for most of the night and has generally found support around the 1.4400 level over the past few days, but if the BOE presser takes on a particularly dovish tone, the pair could quickly drop through 1.4300 and perhaps even 1.4200. Although Mr. Carney has tried to be impartial in the Brexit debate, he clearly favors the Remain side and his fears of a liquidity crisis should the Leave vote win are likely to to make him very cautious on discussing the outlook for UK prospects. All of that is likely to put further pressure on cable as the day progresses.

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