Risk off as attentions turn to CPI update and Federal reserve meeting

Daily Currency Update

A risk off vibe engulfed markets through trade on Tuesday, driving losses across key equity indices and commodity currencies. Macroeconomic news flow continues to disappoint and while markets chose to ignore broader trends and chase risk assets, last week the sustained stream of negative data points has finally overwhelmed investors. Having tested 0.6980 through the early part of the domestic session the AUD tracked steadily lower overnight before finding supports at 0.6920/25. A decline in US consumer discretionary spending, coupled with mixed corporate earnings and a downgrade in IMF global growth forecasts forced investors toward the relative safety of haven assets, bolstering demand for the USD. Our attentions turn now to Q2 CPI data and the latest Federal reserve policy update. We anticipate a significant uptick in year on year inflation pressures and a sustained advanced across underlying core goods and services. A print above 6.3% will heap more pressure on the Reserve Bank policy makers to accelerate the pace of interest rate hikes in a bid to quell cost of living pressures. Markets have priced in a 75-basis point FOMC hike and as such our attentions turn to Fed Chair Powell monetary policy statement. Despite signs the US economy is trending toward recession we anticipate the Fed will stay on message, pushing an aggressive program of rate hikes to quell further price pressures.

Key Movers

The USD, CHF and JPY all outperformed through trade on Tuesday as a risk off mood engulfed investors. The USD found favour while the Euro gave up 120 point plunging back through 1.02 and 1.0150. European natural gas prices continue to rise, jumping 15% Tuesday, marking a 25% increase this week alone. Reports Gasprom will cut supply through its Nordstream 1 pipeline to just 20% of capacity have forced EU countries to introduce rationing measures in a bit to maintain supply through the upcoming winter. Having broken above 200 Euro per mega watt hour Gas prices are now at their highest level since mid-March amplifying pressures on the EU and pushing to toward the brink of economic disaster. Having staved off a break below Parity investors are still pricing a significant downturn in Euro fortunes moving through the 2nd half of the year as headwinds continue to strengthen. Our focus today turns to the Fed policy update and Forward guidance ahead of the September meeting.

Expected Ranges

  • AUD/USD: 0.6830 – 0.7020 ▼
  • AUD/EUR: 0.6780 – 0.6950 ▲
  • GBP/AUD: 1.7230 – 1.7480 ▲
  • AUD/NZD: 1.1080 – 1.1180 ▲
  • AUD/CAD: 0.8880 – 0.9020 ▲

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