RBA Downgrades Inflation Forecast, Japan Preliminary GDP Beats Forecast

Japan’s economy expanded at an annualized rate of 1.9 percent in April-June, bouncing back from a contraction in the previous quarter, government data showed on Friday, in a sign its recovery momentum remained intact.
James Hyerczyk
AUD/USD
AUD/USD

The U.S Dollar is trading lower against a basket of currencies early Friday ahead of the release of key U.S. consumer inflation data at 1230 GMT. The EUR/USD is trading slightly better after hitting its lowest level since June 21. Dovish outlooks by their respective central banks continue to pressure the AUD/USD and NZD/USD. The USD/JPY is being pressured by stronger than expected economic data from Japan.

At 0235 GMT, September U.S. Dollar Index futures are trading 95.420, up 0.065 or +0.06%.

Australian Dollar

The Australian Dollar is trading lower early Friday after posting a dramatic sell-off the previous session and following the release of the Reserve Bank of Australia’s quarterly Statement on Monetary Policy and updated set of economic growth projections earlier today.

The central bank confirmed it has downgraded its 2018 inflation forecast, after flagging the change in Tuesday’s rate decision. Additionally, its longer-term outlook for inflation was little-changed. The central bank now expects core inflationary pressure to remain low through the end of 2020.

The RBA now expects both core and underlying inflation to rise by 1.75% to December 2018, down from the May forecasts of 2.25% and 2% respectively. Beyond that time frame, the central bank kept its inflation forecasts relatively unchanged. Previously, it expected both core and underlying inflation to reach 2.25% by the middle of 2020. That’s still the case, and the bank now expects the same growth rate to be maintained all the way through to December that year.

In Tuesday’s rate announcement, Lowe also said that “a further gradual decline in the unemployment rate is expected over the next couple of years to around 5%”. The RBA maintained that the unemployment rate will stay around 5.25% through June 2020, before dropping to 5% in December.

The central bank slightly bumped up its forecast for GDP growth in Q2 2018, to 3% from 2.75%. Longer-term, the bank’s growth projections were little-changed. It still expects GDP growth to average 3.25% over the next two financial years, before falling to 3% in June 2020 and remaining at that level through to December.

The latest set of projections confirmed that the RBA still looks set to keep interest rates on hold for the foreseeable future.

Japanese Yen

The USD/JPY is trading lower early Friday in response to stronger-than-expected Japanese economic data.

Japan’s economy expanded at an annualized rate of 1.9 percent in April-June, bouncing back from a contraction in the previous quarter, government data showed on Friday, in a sign its recovery momentum remained intact.

The preliminary reading for second-quarter gross domestic product (GDP) compared with a median estimate for a 1.4 percent annualized increase. It followed a revised 0.9 percent annualized rate of contraction in the first quarter, the Cabinet Office data showed.

In other news, the Producer Price Index (PPI) came in at 3.1%, versus a 2.9% estimate. The previous reading was 2.8%.

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