Market Drivers for July 23 2014

MPC votes 9-0 on rates and remains stationary in its view of policy

AU inflation runs hot pushing AUD/USD to 9450

Nikkei -0.10% Europe 0.39%

Oil $102/bbl

Gold $1310/oz.

Europe and Asia:

AUD AU CPI 0.8% vs. 0.8%

GBP MPC Minutes vote 9-0

GBP Mortgage Approvals 43.3K vs. 43.4K

North America:

CAD Retail Sales 8:30

In a lively Asian and European session trade, cable rally fizzled in the wake of MPC minutes that showed no tilt towards tightening, while Aussie soared to 9450 after hotter than expected CPI data allayed any fears of further RBA rate cuts.

In UK the MPC minutes revealed that UK policy makers remain decidedly nuetrat with respect to monetary policy offering no clues as to when they may hike rates. The minutes showed a 9-0 vote to keep rates unchanged in the July meeting although some members did feel that conditions have become more balanced over the past few months than earlier in the year.

Some members felt that the risk of small rate rise derailing the UK economy have diminished and the MPC expected UK growth to come in at 0.9% in Q2 before slowing modestly in H2 of this year. However, despite relatively sanguine assessment of the UK economy, the monetary authorities pointed out that size of labor slack remain uncertain with weakness in wages in face of strong employment becoming more striking.

Indeed we believe that this point is the key to BOE reticence towards any tightening as wage growth remains lackluster. Until and unless wages begin to rise appreciably the BoE is likely to remain stationary for the time being as they perceive no serious threat to inflation.

Cable drifted lower in the aftermath of the release, dropping below the 1.7050 mark as traders were clearly disappointed with lack of hawkishness on the MPC. The pair could now tumble towards the 1.7000 level as the day proceeds.

Meanwhile Aussie took the opposite track, rising to a high 9447 in morning European dealing as the CPI data came in hotter than expected. The trimmed mean CPI printed at 0.8% versus 0.6% the month prior suggesting that inflationary pressures remain Down Under and will constrain any RBA efforts to talk the currency lower. With inflation in the upper range of RBA targets, the central bank will not be able to justify lowering rates in order to bring the exchange rate lower.

The news helped fuel a strong short covering rally in Aussie, but the pair is likely to find much stiffer resistance at the key 9500 level as the week proceeds.

With no North American data on the calendar except for Canadian Retail Sales, the markets are likely to extend the overnight ranges with EUR/USD at 1.3450 and cable at 1.7000 remaining key support levels over the next 24 hours.

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