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EUR: No trend in sight.
Reduced sensitivity to risk sentiment coupled with stable monetary policy expectations have been keeping the single currency broadly range-bound for most of the last few weeks. This is unlikely to change anytime soon, especially not on the back of next week’s June industrial production and preliminary Q2 GDP data releases. In particular GDP is unlikely to have any meaningful impact on growth expectations due to its backward looking nature.
As a result of the above outlined conditions majors such as EUR/USD should be evaluated by the USD angle. We remain of the view that markets are too pessimistic as when it comes to higher rates in the US by the end of the year. As such we believe there is room of diverging monetary policy expectations to the detriment of EUR/USD.
AUD: Don't fight the Fed.
Despite an RBA rate cut and disappointing local data, AUD/USD was little changed over the week. Firmer commodity prices also helped the currency. AUD will likely continue to be driven by international events over the coming week, especially after the shift in market pricing for the FOMC post the US non-farm payrolls data. Locally, business and consumer confidence data will be important barometers of the impact of the uncertain general election outcome on confidence and potentially investment. These confidence readings could add modestly AUD related volatility. Business confidence bounced a bit going into the election as polls pointed to a good showing by the incumbent Liberal-National Party (L/NP) Coalition government. Normally, L/NP victories lead to at least a temporary bump in business confidence, but a small majority for the Prime Minister, Malcolm Turnbull’s, government will likely erode confidence.
We believe consumer confidence is likely to decline post the election outcome but it should get a boost from the RBA’s rate cut. RBA Governor, Glenn Stevens’, speech will be closely watch for forward guidance, but he will likely repeat much of the rhetoric from the statement on Monetary Policy and so the speech could have only a modest market impact.
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