Aussie Dollar Sinks on Soft CPI, Euro May Fall on PMI Data

The Australian Dollar sank as soft first-quarter CPI data eroded RBA rate hike bets. The Euro may decline if April’s PMI figures bolster the case for added ECB stimulus.

Talking Points:

• Australian Dollar Plummets as Soft CPI Erodes RBA Rate Hike Bets    

• Euro May Decline if Soft PMI Data Boosts ECB Stimulus Speculation    

• Minutes from April’s BOE Meeting Unlikely to Stir Pound Volatility

The Australian Dollar sank in overnight after first-quarter CPI data fell short of expectations, pouring cold water on investors’ RBA interest rate hike outlook. The headline year-on-year inflation rate registered at 2.9 percent, falling short of the 3.2 percent reading forecast by economists ahead of the release.

While the RBA has advocated a “period of stability” on benchmark borrowing costs in recent policy meetings, markets have been busy speculating on what the next move will be. Within that context, softer price growth readings undermine the perceived probability of a hike when the standstill ends, eroding yield-based support for the Aussie and sending the currency lower.

April’s preliminary set of Eurozone PMI figures headlines the calendar in European hours. Consensus forecasts point to a slight slowdown in manufacturing- and service-sector growth compared with March, with the region-wide Composite PMI gauge hitting the lowest level in three months at 53.0.

News-flow from the single currency area has been increasingly underperforming relative to expectations since late January, with a Citigroup gauge measuring the gap between economists’ estimates and realized outcomes now at its most dismal level since 10 months. That suggests analysts are underestimating the degree of malaise in the currency bloc, opening the door for downside surprises on today’s results.

Slowing economic activity typically puts downward pressure on price growth, exacerbating the Eurozone’s persisting disinflation problem and boosting the probability of additional ECB stimulus in the minds of investors. Needless to say, such an outcome would bode ill for the Euro and we are monitoring price action for selling opportunity.

Minutes from April’s Bank of England policy meeting are likewise on tap. A steep slide in the inflation rate argues that there remains a long way to go before space capacity – the focal point of BOE forward guidance since February – is sufficiently drawn down to trigger tightening. That suggests the Minutes document will contain little besides rhetoric reinforcing an amply priced-in status quo, offering little impetus for British Pound volatility.

Critical Levels