Overnight the Australian Dollar staged an impressive rebound, surging against peers like the US Dollar and Euro, as domestic inflation figures were published.
Although Australia’s Westpac Consumer Confidence measure declined, falling by 1.7 per cent in January to post a reading of 103.3 from 105.0 in December, the odds of the Reserve Bank of Australia issuing a rate cut dipped as the nation’s consumer price index surprised estimates.
Quarter-on-quarter, consumer prices advanced by 0.8 per cent in the final three months of 2013 – double the 0.4 per cent estimated.
On the year prices climbed by 2.7 per cent, higher than the 2.4 per cent expected.
The trimmed mean measure of core prices jumped 2.6 per cent in the fourth quarter, year-on-year.
With inflation coming in above the mid-point of the central bank’s target range the Australian central bank has less incentive to introduce an additional rate cut in the near future.
As economist Paul Bloxham explains; ‘It was a significant upside surprise for the market and for the RBA. It seems to reflect that the Aussie Dollar’s effect on holding down inflation has finally started to wear off. It looks as though inflation has passed its trough and we are still of the view that the RBA won’t be cutting rates any further.’
The odds of an RBA rate cut occurring plummeted from 42 per cent to 23 per cent in the immediate aftermath of the data’s publication.
The ‘Aussie’ exchange rate continued to trade higher against its major rivals as European trading began, and an absence of significant economic news for the Eurozone means that the EUR/AUD pairing is likely to hold on to declines in the hours ahead.
As the week progresses Australia’s consumer inflation expectation report and China’s HSBC/Markit Flash Mfg PMI could inspire further Australian Dollar volatility.
We forecast that EUR/AUD movement will also be driven by services/manufacturing PMI reports for the Eurozone.
If the gauges show that output increased in the currency bloc and its largest economy the Euro could recover ground against its South Pacific rival.
Euro (EUR) Exchange Rates
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