The RBA Holds Rates, With Service Sector PMIs in the Spotlight through the Day, Bringing the EUR and GBP into Focus

Earlier in the Day:

Risk aversion through the European session eased to a certain degree on Monday as the Dollar recovered from intraday lows against the Yen and European equity markets pared losses before the close, the U.S administration and a more unified approach towards the North Korean regime easing concerns that the U.S may ruffle China’s feathers in the interest of bringing an end to Kim Jung-Un’s nuclear program that has advanced at a quicker pace than many had expected, even with sanctions in place.

The Dollar was down another 0.28% against the Yen at the time of the report, as risk aversion continued to plague the markets, with no clear action plan announced overnight.

With the markets having one eye on media outlets for news on what’s next, the economic calendar is on the busier side for the day ahead.

Key stats through the early part of the Asian session included service sector PMI figures out of China, which showed a pickup in activity, adding further evidence that the Chinese economy was likely to see sustainable growth through the year, in line with the IMF’s recent forecasts, which was good news for the AUD in the run up to the RBA decision and statement, though perhaps not for the RBA, the AUD sitting at $0.797 ahead of the interest rate decision and statement release.

Earlier this morning, the RBA announced its September interest rate decision, holding rates at 1.5%, which was in line with market expectations and the forward guidance provided in previous policy meeting minutes, with the markets more eager to slice and dice the RBA Rate Statement accompanying the decision to gauge what lies ahead, AUD strength and ongoing concerns over the labour market and rising household debt outpacing wage growth issues faced by policy decision makers.

Key Points from the RBA Statement included:

• Australia’s terms of trade are expected to decline over the coming years, despite rising commodity prices and improved global economic conditions.
• Wage growth and core inflation remains soft in most countries, while the general consensus is that the monetary policy easing cycle has come to an end.
• Recent data supports the RBA’s forecast on improving economic growth over the coming year, though slow growth in wages and high levels of household debt are expected to limit future growth on spending.
• Wage growth remains weak and is likely to remain so for some time yet.
• The AUD has appreciated in recent months, with a weaker U.S Dollar contributing to the upside, a higher exchange rate expected to weigh on price pressures in the economy, not to mention the outlook for economic growth and employment.

The AUD fell from $0.79658 to $0.79477 upon release of the statement, before recovering to $0.796 levels, with the statement providing nothing particularly new for the markets to cause an AUD sell-off or shift in outlook towards policy, with concerns over North Korea the negative for the AUD through the day.

The Day Ahead:

Moving across to today’s European and U.S session, key stats through the day include service sector PMI figures out of the Eurozone and the UK, with U.S service sector numbers delayed until tomorrow due to Monday’s public holiday, leaving stats out of the U.S limited to July factory orders, which are Dollar negative based on forecasts.

We will expect the stats out of the Eurozone to have a relatively limited impact on the EUR for the day ahead, as the markets look ahead to Thursday’s ECB monetary policy decision and press conference, there being plenty of uncertainty over how Draghi will get through the press conference without letting the cat out of the bag on the asset purchasing program and the much talked about tapering. Weaker Spanish and Italian service sector numbers added pressure on the EUR going into the European session, with the EUR down 0.19% at $1.18735 at the time of the report, easing back from $1.19 levels hit earlier in the day.

Retail sales are also scheduled for release out of the Eurozone this morning, which are forecasted to slide in July, weighed by the slide in German retail sales numbers, which will provide some further short-term weakness to the EUR, though negative sentiment towards the Dollar may well prevail through the day, offsetting the effects of weaker July figures, the markets yet to be convinced on whether the ECB President will deliver a dovish blow to the EUR come Thursday, the EUR up 0.1% against the Dollar.

We’re certainly getting into a pivotal time of the year from a monetary policy perspective, with the FED having rocked the applecart for the RBA and the ECB in particular, the talk of currency appreciation leading markets to tempering the outlook on a shift in policy and a move towards normalization.

The U.S was closed on Monday for Labour Day and we are likely to see the U.S markets playing catch up, which should provide some needed support through to today’s Factory Order numbers, the Dollar Spot Index up 0.01% at 92.646 at the time of the report.

Ahead of the U.S stats, the Pound will also be in focus this morning, with August service sector PMI figures scheduled for release shortly. August PMI figures have been mixed ahead of today’s data, with the manufacturing sector seeing a sharp increase in activity, while construction sector activity eased. Service sector contribution to the UK economy is of far greater significance however and the Pound could see some much needed support should the figures impress, though forecasts are for a softening in service sector activity, which may well see the Pound fall back to sub-$1.29 levels, pressure already building as a result of the noise over Brexit negotiations.

One this is for certain, few if any are currently considering BoE MPC monetary policy, which is in stark contrast to the summer, when the BoE was expected to be one of the first movers, following the FED’s continued gradual path towards monetary policy normalization.

At the time of the report, the Pound was down 0.10% at $1.29183 against the Dollar, with direction of the Pound not only hinged on today’s stats, but also how talks progress on Brexit.