USD gains from the start of the day were erased in the afternoon after ISM services came in lower than expected. Earlier in the afternoon the S&P services and construction PMIs also came in lower than expected. Europe's numbers also disappointed in the morning coming in lower than expected, with the UK numbers being the outlier coming in higher than expected. Europe's Sentix investor confidence came in lower than expected earlier in the day as well.
The AUD continued its 4-day winning streak after the Reserve Bank of Australia (RBA) surprised markets by hiking by 0.25% to 4.1%, the highest since April 2012, citing upside risks to inflation and any delay in hiking rates would be costly. GBPAUD is now 3% lower off the recent highs.
* Daily move - against G10 rates at 5:00pm, 05.06.23
** Indicative rates - interbank rates at 5:00pm, 05.06.23
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UK and German construction PMIs in focus today as well as retail sales from Europe. A sense of consumer sentiment can be judged from these numbers, which has been slowly deteriorating in the single-bloc over the last few months. The surprise hike by the RBA this morning may well lift expectations for similar hikes by other central banks. Next up amongst the G10 will be the Bank of Canada (BoC) tomorrow where the current expectation is for rates to remain at 4.5% but to be accompanied with hawkish comments given inflationary pressures in Canada. If this were to happen, then it wouldn’t be a surprise to see markets price in the Fed could make a similar move. Only last week Fed speak suggested that the Fed will hold rates in the June meeting. Anything to suggest a hike could happen will likely cause the USD to gain.
Are we due a second wave of inflation? Today’s surprise action by the RBA seems to suggest so, and the accompanying comments indicates further tightening of monetary policy with recent data suggesting upside risks to inflation. Peak interest rate expectations from the RBA are now back to prior highs. Over to the BoC tomorrow to see if we see a similar a hawkish move/comments.
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