AUD steadies in face of escalating inflation concerns
Wednesday 1 June, 2022
Daily Currency UpdateThe Australian dollar edged lower through trade on Tuesday unable to sustain its assault on US$0.72 amid renewed concern surrounding global inflationary pressures. A record rise in the Euro area CPI inflation forced investors to adopt a more cautious approach to risk assets. The undercurrent of uncertainty saw the rebound across US equities stall as higher rates and rate expectations forced investors toward haven assets. The AUD gave up highs at US$0.7205 touching intraday lows at US$0.7150 before finding support. Improved Chinese PMI data coupled with a further decline in daily case numbers helped provide some support, yet fears an uptick in cases will prompt a fresh round of lockdowns across the country's major cities casts a pall on overextended growth expectations. China is investing in a permanent network of COVID-19 testing facilities, clearly indicating it will not be deviating from its COVID-zero platform any time soon. The ongoing economic consequence of China’s COVID-19 policy will remain a headwind for the AUD.
Our attentions today turn to Q1 GDP data. With leading indicators printing above expectations, we expect quarter on quarter growth to print around 0.7%. A miss might heighten growing stagflation fears but given the outdated nature of the report, its impact on currency markets is likely to be relatively muted. Instead, we continue to watch the broader global inflation and growth narrative as key markers for direction.
Key MoversPrice action across major currencies was relatively modest through trade on Tuesday as markets appeared content with absorbing further inflationary shocks. An uptick across global rates and treasuries and a slowdown in equities failed to spill into currency markets as most majors maintained a relatively narrow range. A record lift in the Euro area CPI prompted investors to adopt a more cautious approach elevating the USD and forcing the Euro toward intraday lows below 1.07. CPI inflation printed above 8% in May well ahead of market expectations. The upside surprise comes a week ahead of the ECB's next policy meeting and has prompted investors to price in an immediate end to QE stimulus with a view to hiking interest rates in July. Despite the market pricing in a 100 basis point increase in euro rates before the year end, the consensus view of policymakers appears to be for a measured and steady approach for fear of tipping the economy into recession. Having found support against the euro, the USD pushed back above ¥128 vs the Japanese yen as the rise in global rates prompted further JPY weakness. With the pound firmly entrenched in a narrow range our attentions turn now to US ISM manufacturing data. With expectations for a moderate downward correction, anything beyond consensus estimates could add downward pressure on the USD as markets revise growth forecasts leading into H2.
- AUD/USD: 0.7080 - 0.7220 ▼
- AUD/EUR: 0.6650 - 0.6750 ▲
- GBP/AUD: 1.7480 - 1.7680 ▼
- AUD/NZD: 1.0950 - 1.1070 ▲
- AUD/CAD: 0.9050 - 0.9150 ▼