FX Daily Strategy: N America, September 19th

GBP focus on BoE decision

Rate cut unlikely but GBP may fall if more than 2 dissents

AUD testing the highs of the year

After the FOMC on Wednesday we have the BoE MPC meeting on Thursday. The UK August CPI data on Wednesday was seen by the market as a reason to further reduce the chances of a BoE rate cut at this month’s meeting, but in reality showed mixed signs. Services inflation rose back 0.4 ppt to 5.6%, up from a two-year low but was still below the BoE projection and was almost solely driven by a swing in (very volatile) airfares without which services would have fallen (well) below 5% - this also accounting for the rise in the core rate.  Indeed, the core would have fallen (well) below 3% without airfares.  Moreover, restaurant inflation hit a new cycle low amid generally softer price pressures in which eight (of 12) CPI components fell.  As a result, the overall CPI headline rate stayed to 2.2% in August this chiming with the consensus and two notches under BoE thinking. 

The data (especially ex-volatile services) do not rule out a further rate cut at today’s MPC decision, but it does still seem probable that rates will be left unchanged. In that case the focus will be on rhetoric and the closeness of the vote – it may see at least 2-3 dissents in favour of further immediate easing.  The market consensus is for 2 dissents – any more and GBP should edge a little lower. But it continues to look difficult for EUR/GBP to break the 0.84-0.8450 range near term.

Before the UK data we had the Australian employment data, which produced a larger than expected rise in employment, although this was offset be a small decline in full time employment. Nevertheless, AUD has pushed ahead in the wake of the data, helped by the generally risk positive tone that we have seen in the ake of the FOMC decision, and AUD/USD is testing the highs of the year of 0.6839. Yield spreads suggetss there is plenty of upside scope, with the AUD having been held back in recent weeks by concerns surrounding China. But if these fade, there is scope for AUD/USD to push ahead towards 0.70.