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FX markets hit as worries pivot to “too low” inflation

Markets lower overnight due to concerns about a global slowdown.

Now, low inflation is the worry

Global markets were lower overnight as low inflation readings from the US and China sparked concerns about a global slowdown.

After two years of increasing worries about overheating economies driving inflation higher, the last 24 hours were characterised by falling bond yields and lower commodity prices after lower-than-expected inflation readings.

In China, annualised inflation fell from 0.7% to 0.1% in another sign of slowing demand. Producer prices collapsed to -3.6%. This was seen as another sign of the recent slowdown in Chinese activity.

In the US producer prices dropped from 2.7% to 2.3% while a sharp rise in weekly unemployment claims, from 242k to 264k, also sparked fears about an economic slowdown.

Bond yields, commodities, hit Aussie and kiwi 

Financial markets reacted poorly to the news with big moves lower in bond yields and commodities.

The US ten-year yield fell from 3.44% to 3.38% while copper lost 3.4% and crude oil fell 2.3%.

The Australian dollar was weighed down with the AUD/USD pair falling from the technical resistance at the three-month highs. The AUD/USD fell 1.1%.

Similarly, the NZD/USD also turned from recent highs, to fall 1.1%.

GBP lower after BoE hike

Out of Europe, the focus was on the Bank of England after the UK central bank raised rates by 25 basis points to 4.50%.

However, the British pound was lower, despite raising its inflation forecasts, with a 25-basis point hike seen as too little, too late. The GBP remains relatively high, however, after a strong run over the last 12 months.

The move lower in the GBP reflects similar moves seen in the euro and US dollar after their rate hikes last week. Despite tough talk from central bankers, markets believe that rate hikes are almost done.

Aussie, kiwi sent lower

Table: seven-day rolling currency trends and trading ranges

Key global risk events

Calendar: 8 – 12 May

All times AEST

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