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AUD rangebound as euro surges following Hawkish ECB policy update

Friday 4 February, 2022

Daily Currency Update

The Australian dollar was again largely range bound, tracking between 0.7110 and 0.7165 through trade on Thursday. With little of note on the domestic ticket, the AUD drifted sideways through the local session as investors appeared content to sideline any major bet until after the ECB and Bank of England policy updates. The hawkish shift in rhetoric from both camps helped fuel a rise in global bond yields and dragged the AUD toward the top of the day’s ranges. While little moved against the USD, the AUD fell against the euro and GBP, slipping below 0.6250 and 0.5250 respectively, as markets began pricing a broader central bank tightening. The shift in rhetoric from the ECB and positive tightening in policy conditions from the BoE contrast starkly with the RBA’s stubborn and persistent push to leave rates on hold through the near term. Further improvement in European bond yields and added expectations for monetary policy change could see the AUD drift lower against key crosses through the weeks and months ahead.

Key Movers

The euro was the days big mover, surging back above 1.14 to touch intraday highs at 1.1450, following a shift in ECB rhetoric and a prompt uptick in rate hike expectations. While the ECB maintained its policy stance, ECB president Christine Lagarde lead a shift in rhetoric, acknowledging inflation risks were to the upside and well above the ECB target rate and refused to rule out a possible rate hike before the end of the year. Given Lagarde suggested any rate adjustment was highly unlikely just last month, this is a sharp and direct pivot in message driving markets to adjust policy expectations. In the moments following the press conference, markets increased bets on a rate hike of 10bps in June and 40bps by year end. Bond yields were up across near-and long-term yields while the euro benefited, rallying 1% on the day. Not to be outdone, the Bank of England raised rates by 0.25% taking the base line cash rate to 0.5%, a critical level as it will now see the Bank stop reinvesting within its bond portfolio in a bid to correct the balance sheet. Markets had priced in the move, but were surprised to find four of the nine policy members pushed for a 0.5% rate hike, suggesting the board is split on the best path forward and that a more aggressive approach may be adopted in the future. Sterling pushed through 1.36 to touch intraday highs at 1.3630. The euro and GBP gains have forced the dollar index back below 96 and 95.50, marking intraday lows at 95.24. Attentions today turn to US non-farm payroll data. After Wednesday's dour ADP employment print, markets will be keenly attuned to any significant downturn in labour market performance. With recent Fed commentary suggesting a slow and measured adjustment to interest rates remains prudent, any slowdown in the labour market recover could further dampen prospects of an aggressive interest rate realignment.

Expected Ranges

  • AUD/USD: 0.7030 - 0.7180 ▲
  • AUD/EUR: 0.6190 - 0.6350 ▼
  • GBP/AUD: 1.8980 - 1.9180 ▲
  • AUD/NZD: 1.0680 - 1.0780 ▼
  • AUD/CAD: 0.8950 - 0.9120 ▲