By Paul Newfield
THE WEEK SO FAR
With little to no important data releases in the EEA this week so far, the currency changes came from sources elsewhere. The UK 10-year gilt yield fell to around 4.95% after earlier climbing above 5%, as renewed hopes for a deal to reopen the Strait of Hormuz pushed oil prices lower, easing concerns over inflation. Crude declined after Pakistan signalled that the US and Iran were “close to some sort of arrangement” aimed at reducing tensions and restoring shipping through the strategic waterway. The comments offered a more positive assessment after President Donald Trump had toughened his stance toward Tehran, demanding reparations for deaths linked to Iran and domestic protests.
Meanwhile, the Bank of England left interest rates unchanged in July, with Governor Andrew Bailey saying the dis-inflation process remained on track despite external risks. Recent BRC data showed UK retail sales increased 1.3% year-on-year in July, below the 12-month average, suggesting subdued consumer activity, while Barclays data showed household spending rose 2%, its strongest growth of the year. As a result, Sterling jumped a third of a cent to hit the highest point this month against both the Euro and US Dollar.
Down under, Australia’s 10-year government bond yield rose above 5%, moving back toward multi-week highs after the Reserve Bank kept its cash rate unchanged at 4.35% for a second consecutive meeting, as widely expected. The unanimous decision came as the central bank said the economy was slowing as expected under tighter financial conditions, while keeping the option of another rate hike if upside inflation risks materialise. Markets had also expected rates to remain unchanged after second-quarter inflation came in below forecasts and the housing market weakened more than policymakers had anticipated. GBP-AUD therefore climbed, albeit very slightly. The RBA has already raised rates three times this year, as stubborn inflation and higher energy costs continued to weigh on the outlook. Markets now price around a 40% chance of another hike this year, down from 50% before the decision. Attention now turns to Governor Michele Bullock, who is due to testify before parliament on Friday, while Assistant Governor Chris Kent is scheduled on Thursday. The GBP-AUD rate is now down 8% since this time last year, as inflation and interest rate increases have strengthened the power of the Antipodean notes.
TODAY
The yield on the US 10-year Treasury note eased to around 4.68% on Wednesday, extending its decline into a second session as investors positioned ahead of key inflation data that could provide fresh guidance on the Federal Reserve’s policy outlook. The consumer price index is due later today, with producer inflation figures scheduled for Thursday. Markets remain split over the prospect of a 25-basis-point Fed rate hike in September after the central bank left rates unchanged in July, while firmer oil prices continue to bolster expectations for a hawkish stance. With little else of focus this will be the data to keep an eye on and could cause plenty of volatility.
COMING UP
Tomorrow is a busier day with GDP, business figures, Industrial production, manufacturing, trade balances, construction all due out for the UK, as well as the NIESR monthly GDP tracker. PPI figures are due from the US, with industrial production from the EU. Friday sees GDP, trade and employment balances from the EU and retail sales from the US.