Central Bank Tornado is Near
Central Banks Provide the Volatility This Week
Some central banks arguably present the largest volatility risk to the FX markets this week, as we start with the RBA meeting in the overnight session ahead. A potential rate cut is still on the table, though expectations have diminished considerably .At the start of last week, we saw 25bps price in to tune of 75-80%, but we are very much back to a fifty – fifty call in the wake of the latest Australian inflation stats.
The trimmed figure edged higher over the month of June, and this will not be lost on the central bank, who are already at pains to cut rates given the potential impact on the housing market – or as has been described by some (bubble). The AUD/USD had rallied in line with broader USD sentiment in the meantime, which has been seriously dented by the latest Q2 US growth figures. Fed speakers maintain a pre-election rate hike is still on the table, but continue to qualify this with data dependency. This has helped Cable stabilize also, but with widespread expectations of monetary easing at this week’s MPC, we suspect a heavy tone to play through from here – with Friday’s price action highlighting strong resistance at 1.3300. EUR/GBP looks to be the more comfortable way to play fresh GBP weakness, especially with EU data proving resilient and arguing for a EUR/USD break out on the topside through 1.1200 with its eyes firmly set on 1.4000 return. EUR/GBP looks set to retest the post Brexit highs.
Governor Kaplan Dallas Fed
Dallas Fed governor on a visit to China, Here's what he had to say:
Brexit is going to have a marginally negative impact on US growth (so he is downplaying this risk) if the data until the September meeting is strong then a rate hike will be ’very much on the table’ strong consumption to continue.
His regional Fed office expects GDP growth at just below 2%. Yet another speech trying to orient the markets more on the possibility of a rate hike in September – while money market shows an implied Fed funds rate going up by only 13 bp within one year. We believe that a moment of US dollar rebound is close and maybe the manufacturing ISM will prove to be a catalyst (previously equal to 53.2, now expected to move to 53.0).
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