Risk on for Asia, with UK Inflation and the Pound in Focus

Earlier in the Day:

Key stats through the Asian session this morning were limited to Australia’s business confidence numbers for August, which was a disappointment in August, the NAB Business Confidence Index easing from 12 to 5, bringing the AUD down from $0.80137 to $0.80038 upon release of the data.

It wasn’t all doom and gloom for the AUD however, with the Business Conditions Index ticking up, holding above the long-run average and also at the highest level since early 2008. Other key components of the index that reflected positive trends included an increase in the labour costs sub-index and a sharp rise in the employment sub-index. In contrast, the retail price sub-index slipped into negative territory, raising red flags over household spending, with the decline seemingly in contradiction to the RBA’s outlook towards domestic consumption.

While stats have been on the lighter side, the key driver for the markets through the start of the week remains North Korea, as the U.S administration reportedly watered down its proposal on additional sanctions on North Korea, though even what many call a compromise is expected to hurt the North Korean economy. The United Nations Security Council adopted the new sanctions with the U.S government’s watered down proposal being in the interest of garnering both Russian and China support and, not in response to the threats made by Kim Jong-Un.

U.S markets rallied as tensions eased and following Monday’s gains, Asian equities enjoyed a second day of basking in the sun, with even the Dollar having managed to close out in positive territory, though the gains were far from spectacular.

Through the Asian session, the Dollar managed to hold on to Monday’s gains, hitting a session high 92.014 while there’s just cause for the markets to be cautious, with expectations of a response from North Korea on the latest sanctions something the markets will need to consider.

The Day Ahead:

 

For the day ahead, stats remain on the lighter side, with macroeconomic data out of the Eurozone this morning having been limited to France’s nonfarm payroll figures for the 2^nd quarter. The EUR was able to brush aside the softer increase in payrolls through the 2^nd quarter, despite the 0.4% increase falling short of a forecasted 0.5% rise.

It’s a different story for the Pound today however, with August inflation figures scheduled for release this morning. We’ve seen the Pound bounce back to $1.32 levels of late, with Cable finding support for Dollar weakness and economic data out of the UK, as Brexit continues to be brushed aside by the markets.

The UK Parliamentary vote on Monday went in favour of the British government, with MPs voting in favour of giving the EU Withdrawal Bill a second reading. The EU Withdrawal Bill is intended to bring an end to European Union law being imposed on the UK upon Brexit, by repealing the European Communities Act 1972, returning power on making laws in policy areas to Parliament. The vote in favour will be a positive for the Pound, though how the Pound fares in Brexit will still ultimately hinge on how successfully the UK government negotiates trade terms and we’re some way off talks on trade.

With Monday’s vote out of the way, today’s inflation figures could lead to some confusion over how the BoE views the UK economy and whether a shift in monetary policy is needed in support of economic growth. Interestingly, MPC members have been particularly quiet, with even BoE Governor Carney refraining from making comment on monetary policy, which suggests that the BoE’s forecast of a rate hike no sooner than the 3^rd quarter of 2018 remains unchanged.

A pickup in inflation in August however, could question whether there will be more dissent in Thursday’s BoE Monetary Policy Committee vote, with Haldane having been on the fence before the August meeting. A string of more upbeat stats and pickup in inflation could see the number of votes in favour of a rate hike rise, which would certainly support a Sterling rally, though it’s not just down to today’s inflation figures, with tomorrow’s employment numbers and Thursday’s retail sales figures, due out ahead of the MPC decision, also likely to be considered by Monetary Policy Committee members.

At the time of the report, the Pound was up 0.2% at $1.31893, with the Dollar Spot Index giving up early gains, down 0.03% from Monday’s close to 91.844, with macroeconomic data across the Pond limited to the every increasingly important JOLTs Job Openings, which will likely attract quite a lot of attention following last week’s disappointing jobless claims figures and August’s softer nonfarm payrolls.

As always, the markets will need to look out for any rhetoric from North Korea on the latest sanctions, with any missile test response likely to weigh on the Dollar and market risk sentiment. We have seen the risk off / risk on sentiment in the markets provide some good buying opportunities in recent weeks and the Dollar has certainly been in the thick of it all.