Powell gets tough in Sintra
The Australian and New Zealand dollars took a steep step lower yesterday after a big drop in Australian headline inflation while Federal Reserve chair Jerome Powell stepped up the rhetoric on interest rate hikes.
Speaking at the European Central Bank forum in Sintra, Portugal, Powell said he was still considering consecutive rate hikes at the Fed’s July and September meetings. Powell said the US’s strong labour market has the potential to drive a rebound in inflation.
The US dollar gained strongly with the USD index up 0.5%.
The AUD/USD fell 1.3% with big losses seen in the AUD/EUR, down 0.9%, and the AUD/JPY, down 1.0%.
US money markets now see a 76% chance for a 25-basis point hike when the Fed next meets on 27 July.
Kiwi hardest hit
Across markets, the New Zealand dollar was the hardest hit, with the NZD/USD down 1.4%. The NZD is traditionally highly sensitive to changes in US interest rate expectations.
The kiwi was also weighed down in other markets with the NZD/EUR losing 1.0% and the NZD/JPY falling 1.2%. The NZD/AUD lost 0.2%.
The Chinese yuan continued to see further losses with the pair hitting new seven-month highs yesterday.
The Chinese yuan saw a small recovery earlier in the week after the People’s Bank of China set a stronger CNY fix and likely instructed state banks to sell dollars to contain some of the CNY’s recent weakness, according to Reuters.
Most other currencies were weaker versus the US dollar with the euro and British pound, recently in focus due to expectations for further rate hikes, lower.
Aussie headline CPI drops, but core still worries
The Australian dollar was also hit by a big drop in the all-important monthly headline inflation reading yesterday.
The monthly headline annual figure dropped from 6.8% in April to 5.6% in May with falls in fuel and travel costs driving the move lower.
However, the “core” measure, of most concern to the Reserve Bank of Australia, barely budged, with the annual rate easing from 6.5% in April to 6.4% in May.
As a result, market pricing for a rate hike next week didn’t move much, falling from 23% on Tuesday to 16% after the CPI release (source: ASX).
Looking forward, the difference between headline and core inflation will also be closely watched over the next 48 hours, with French and German inflation figures due tonight, Eurozone numbers out Friday evening, and the US personal consumption and expenditure price reading released Friday night.
In both Europe and the US, core inflation remains stuck near the year’s highs, causing central banks to continue to warn of further rate hikes.
Aussie, kiwi plunge on Powell’s tough talk
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Calendar: 26 – 30 June
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
