The British Pound may rise if an upbeat quarterly Bank of England Inflation Report rekindles speculation about a possible interest rate hike in 2015.
Pound May Rise as Upbeat BOE Inflation Report Fuels Rate Hike Bets
NZ Dollar Gains as RBNZ Warns on Loose Monetary Policy Dangers
Euro Unlikely to Find Follow-Through in First-Quarter GDP Report
The New Zealand Dollar outperformed in overnight trade after the release of the RBNZ Financial Stability Report (FSR). The document identified the frothy Auckland housing market, low prices for dairy exports and loose global financial conditions as risk factors. On the final point, RBNZ Governor Wheeler said low rates encourage investors into riskier assets and warned that the prices of financial and real assets are becoming increasingly overextended, which may bring on a disorderly unwind ahead. The markets seemed most taken with this part FSR, seemingly interpreting it as a reason to pare back RBNZ rate cut bets. Indeed, the Kiwi rallied alongside a jump in three-month borrowing costs.
The Australian Dollar likewise advanced as prices continued to react to the shift away from harsh austerity in the FY2016 federal budget unveiled yesterday. While the projected deficit registered at A$35.1 billion, which turned out to be a bit narrower than the A$40 billion expected by economists, it still marked a looser posture compared with the A$31.2 billion shortfall projected in December. As we argued previously, the markets probably interpreted a pro-growth turn in fiscal policy as reducing the future need for aggressive further easing on the monetary side of the equation. Still, the markets see a 77 percent probability of another 25bps interest rate cut at June’s RBA meeting.
Looking ahead, the preliminary set of first-quarter Eurozone GDP figures seems unlikely to generate lasting follow-through for the Euro considering the figures’ limited impact on the near-term ECB policy trajectory. Indeed, the central bank looks to be essentially on auto-pilot as it continues to implement its €60/billion a month QE effort. Meanwhile, April’s UK Jobless Claims data is likely to play second fiddle to the unveiling of the quarterly Bank of England Inflation Report. The document has become the premier vehicle for communicating the central bank’s intentions to the markets. The British Pound may rise if firming performance in the Eurozone – the UK’s top export market – inspires upbeat rhetoric and rekindles bets that Governor Mark Carney and company may yet raise rates in 2015.
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