As expected, the Reserve Bank of Australia cut interest rates by 0.25% to a record low of 2.50% at the latest policy meeting. In the accompanying statement, the central bank was slightly less dovish than expected as there was no direct reference to the possibility of lowering rates further. There was a relief rally in the Australian dollar as AUD/USD pushed back to 0.9000 before it dipped lower again following a successful defence of this key level.
For the fourth trading day in succession, the UK economic data was stronger than expected. Following three strong PMI releases, it was the turn of industrial production to out-strip market expectations. The manufacturing data was particularly impressive with a 1.9% gain for June following a 0.7% drop the previous month and Sterling rallied again with a GBP/USD peak at 1.5390. Sterling was unable to hold the gains and retreated to test support below 1.5350 with no additional support from the latest NIESR report. There was also caution ahead of Wednesday’s pivotal Bank of England inflation report.
The Euro-zone data had a firmer tone with some relief that Italy’s GDP decline was held to 0.2% for the second quarter compared with an expected 0.4% decline, although this was still the eighth consecutive contraction. There was also a much stronger than expected reading for German factory orders with a 3.8% monthly increase. The Euro held firm into the New York open, but was unable to move above the 1.33 level.
There was a sharp decline in the latest US trade deficit to US$34.2bn for June from US$44.1bn previously as exports advanced modestly while there was a sharp decline in imports. This decline boosted expectations of an upward revision to second-quarter GDP, but also raised some doubts surrounding consumer spending levels.
The dollar was unable to gain any traction following the trade data and a stronger than expected reading for job openings also failed to give the US currency a boost. Comments from Regional Fed President Lockhart were broadly neutral as he stated that monthly payroll growth of 180,000-200,000 would be a good place to start bond-purchases tapering. Such a move was possible in September or October, although there was still an important element of uncertainty.
In this environment, there was a fresh EUR/USD attack on the 1.33 level later in the New York session with a move to the 1.3315 area. USD/JPY was unable to sustain a recovery above 98.50 and retreated to re-test support below 98.0 in tandem with a generally softer US currency.