The Aussie dollar was the prime mover on Wednesday morning after inflation numbers came in higher than expected. AUD has zoomed up 0.85% against the US dollar to 0.7104, touching 0.712 this morning for the first time in over five months.
Australian inflation rose to 8.4% in December from 7.3% in November, far surpassing market expectations of 7.7% and putting pressure on the Reserve Bank of Australia to keep up its interest rate hikes.
Around the G10 currencies, AUD made its biggest gains against the Japanese yen, pound, euro, Swiss franc and both New Zealand and Canadian dollars, all above 0.85%.
The euro was also on the move, creeping higher rather than making strides, against JPY, CHF and ZAR.
Yesterday’s PMI figures were mixed and led to some forex volatility, with better news for the euro area but US numbers indicating the economy still slowing down.
EUR/USD slid from 1.089 to 1.084 yesterday before beginning a rebound that has seen it back up to 1.09 this morning.
With the EU data becoming more positive, some economists are no longer expecting a recession in 2023, including those at Deutsche Bank.
Analysts at the bank said their economist colleagues now expect the euro area to grow by 0.5% in 2023 and have lowered their headline inflation outlook to 5.8%.
“Nevertheless, they don’t think the ECB can take their foot off the hawkish pedal just yet, since an improved growth outlook and stronger domestic demand raises the threat of more persistent underlying inflation.”
ECB speakers continued to publicly discuss how long to keep hiking rates by 50 basis points, with some citing a strong case for staying on the current course, while doves said beyond next week’s meeting more hikes would not be supported by the macro data.
For now, the market is pricing in two 50bps moves as the most likely outcome.
Looking at GBP, the flash composite PMI figure yesterday was the lowest in two years, while public sector net borrowing was worse than expected.
GBP/USD plunged from $1.24 to the 1.22s, which analysts noted was below its year-to-date ascending channel, while EUR/GBP continues the rise of recent days, climbing from 0.878 to 0.885 this morning.
With Cable continuing to struggle below the 1.2450 area, Micheal Hewson at CMC Markets said moves above 1.2450 could see a move towards 1.2600 while a move below 1.2250 could see the pair drop towards 1.2170.
Canada in focus
Data on Wednesday includes the German Ifo business climate indicator and later on the Bank of Canada’s policy decision.
Hewson noted that back in October, Ottowa had "set the cat amongst the pigeons" when it raised rates by a less than expected 50bps, which had alerted the market to the suggestion that some central banks waking up to the possibility that too aggressive rate rises could do more harm than good.
Canada's central bank then followed that with another 50bps rate rise in December, to 4.25%.
"With today’s decision coming a week before next week’s Federal Reserve decision, a lot of people are looking at the Bank of Canada for a steer in terms of whether we could see a step down from the Fed," said Hewson.
"It is widely anticipated that the BoC will announce another step down to 25bps, after headline inflation fell back to 6.4% from 6.8% in December. Median core prices however have remained sticky, remaining at 5% in November and up at the highs of the year, which in turn may mean the Bank of Canada could decide to err towards 50bps."