• UK CPI. UK yields plunged & GBP weakened after UK inflation came in lower than expected. This helped boost the USD.
• AU jobs. Australian jobs report released today. The data has been more volatile than usual recently. A downside surprise would be a AUD negative.
• AUD sluggish. Firmer USD has weighed on the AUD. Beyond the AU jobs data, the US Fed meeting is coming into focus. Another hike expected next week.

Inflation outcomes continue to drive markets. Attention overnight was in Europe. For the first time in 5 months, UK CPI inflation undershot expectations. Headline UK inflation slowed from 7.9%pa to 7.3%pa (mkt 7.5%), with core inflation also decelerating, coming in at 6.9%pa. UK inflation is lower, but it isn’t low. And the Bank of England still has more work to do. That said, markets had become over-excited with how much further the BoE could raise rates. The BoE bank rate is now 5%, and ahead of the UK CPI a peak rate of ~6% by March 2024 was discounted. However, there was a meaningful shift post the data, with almost a full hike taken out of the interest rate curve. Markets are now factoring in a ~35bp hike at the 3 August BoE meeting, down from nearly ~50bps at the start of July. UK 2-year yields plunged ~20bps (now 4.84%), while the UK 10-year yield fell ~13bps (now 4.2%). The downshift in UK yields weighed on GBP. At ~$1.2935 GBP is ~1.2% lower so far this week, and AUD/GBP has edged up a bit, but at ~0.5235 it remains near the bottom of its cyclical range.

By contrast, the final reading of June Eurozone inflation was revised higher. Core inflation is now said to be running at 5.5%pa. The data helped Eurozone bond yields unwind an initial UK CPI inspired dip. The German 10-year ended the day ~6bps high (now 2.43%). US bond yields also whipped around, and on net, the slight lift in the 2-year rate (now 4.77%) and fall in the 10-year (now 3.75%) saw the 2s10s yield curve invert back to -102bps. Equity markets were mixed, with the US S&P500 ticking up another ~0.2%, while the UK FTSE100 outperformed (+1.8%) with a lower GBP a tailwind for multi-national earnings. In commodities, wheat futures rose nearly ~9%, one of the largest one-day moves in a decade, after Russia warned that ships travelling to the Ukraine could be considered as carrying military cargo. A renewed upswing in food prices would be a positive inflation shock that could rattle markets.

In FX, the USD index rose as rate differentials continued to shift in favour of the US. In addition to the weaker GBP, USD/JPY lifted back above ~139.50, and EUR slipped back down to ~$1.12. AUD and NZD weakened, with the former (now ~$0.6772) at a ~1-week low. We continue to think that the USD can claw back more lost ground over the near-term. Another low US initial jobless claims print (10:30pm AEST) would support our thinking that the US Fed will raise rates again next week (27 July AEST) and reiterate that the door to further tightening remains open and any rate cuts are some time away.

Global event radar: Japan CPI (Fri), Eurozone/UK PMIs (24th July), US FOMC Meeting (27th July), Fed Chair Powell Speaks (27th July), ECB Meeting (27th July), US GDP (27th July), Bank of Japan Meeting (28th July), US PCE Deflator (28th July), China PMIs (31st July), Eurozone GDP & CPI (31st July).

AUD corner

The AUD has slipped back over the past 24hrs. The firmer USD stemming from the downward repricing in UK interest rate expectations and weaker GBP, and more favourable short-end differentials against the JPY and EUR has been a factor (see above). On the crosses, AUD has also lost some territory against the EUR (-0.3%), CAD (-0.7%) and NZD (-0.4%) compared to this time yesterday, though it has slightly outperformed the beleaguered GBP (+0.2%).

The pullback in the AUD over the past week has been in line with our thinking. As we noted, the upswing over early-July was somewhat reminiscent of the (unsustainable) rise that occurred in June. Global headwinds for the AUD remain in place. Global industrial activity continues to decelerate as aggressive rate hikes crimp spending and production, while China’s post-COVID recovery continues to falter. The USD has also recovered some ground, and we think this run has a bit more to go over the near-term. US initial jobless claims are released tonight (10:30pm AEST). In our opinion, another low reading (which is indicative of tight US labour market conditions) could see US interest rate expectations lift as participants focus in on next week’s US Fed meeting (27 July AEST). We are looking for another 25bp hike by the US Fed, and think policymakers are likely to stress that based on the underlying fundamentals the door to more tightening remains open. This could dampen risk sentiment, and/or boost the USD against cyclical currencies like the AUD, in our view.

Locally, the June labour force report is released today (11:30am AEST). As is normally the case, the jobs data is likely to generate some AUD volatility. However, we think the risks are tilted to a weaker outcome, which if realised could exert even more downward pressure on the AUD as RBA rate hike expectations are scaled back. Consensus is looking for a ~15,000 gain in employment and for the unemployment rate to hold steady at 3.6%. Due to the timing of Easter and School holidays the labour force survey has been more volatile than usual recently. Less favourable sample rotation impacts could generate a negative surprise in today’s data. That said, stepping away from the month-to-month noise, it is a matter of when, not if unemployment rises. Various forward indicators show that labour demand is cooling, and as the economy slows the unemployment rate, which is a lagging indicator, should lift.

AUD event radar: AU Jobs (Today), Japan CPI (Fri), Eurozone/UK PMIs (24th July), AU CPI (26th July), US FOMC Meeting (27th July), Fed Chair Powell Speaks (27th July), ECB Meeting (27th July), US GDP (27th July), Bank of Japan Meeting (28th July), AU Retail Sales (28th July), US PCE Deflator (28th July), China PMIs (31st July), Eurozone GDP & CPI (31st July), RBA Meeting (1st Aug).

AUD levels to watch (support / resistance): 0.6688, 0.6713 / 0.6850, 0.6925

SGD corner

USD/SGD has ticked up a little over the past 24hrs (now ~$1.3254) with the firmer USD, driven in large part by GBP weakness and to a lesser extent the softer JPY and EUR, a key factor (see above). On the crosses, EUR/SGD (now ~1.4843) has consolidated and remains within touching distance of its cyclical peak. SGD/JPY has drifted higher, and at ~105.37 it is around its highest level since 10 July.

As outlined above and over recent days, we think the USD (and USD/SGD) can continue to bounce back over the near-term. US initial jobless claims are released tonight. In our view, another low reading could see US interest rate expectations nudge up. Overall, the still solid US activity data pulse, tight labour market conditions, and uncomfortably high core inflation points to another rate rise by the US Fed next week, and we believe policymakers could reiterate that further tightening is possible based on the macro backdrop. At the same time, various indicators show that the slowdown in global industrial activity is still coming through, and momentum in China’s economy remains sluggish. This is normally a headwind for cyclical currencies like the SGD.

SGD event radar: Japan CPI (Fri), Singapore CPI (24th July), Eurozone/UK PMIs (24th July), US FOMC Meeting (27th July), Fed Chair Powell Speaks (27th July), ECB Meeting (27th July), US GDP (27th July), Bank of Japan Meeting (28th July), US PCE Deflator (28th July), China PMIs (31st July), Eurozone GDP & CPI (31st July), RBA Meeting (1st Aug).

SGD levels to watch (support / resistance): 1.3140, 1.3200 / 1.3377, 1.3438