As expected, the Reserve Bank of Australia left interest rates on hold at 2.50% following the latest policy meeting. The statement maintained the possibility that the Australian dollar could weaken further and was cautious over the economic outlook, but specific references to the potential for further rate cuts was left out. This potential shift pushed AUD/USD back above 0.9000 with a peak just above 0.9050 later in New York.
Currency markets spiked briefly during the European session after a Russian news agency report that missiles had been launched in the Mediterranean. There was speculation that the US had launched a missile attack on Syria which undermined risk appetite but, after some confusion, it was confirmed that it was a joint air-defence test by Israel and the US. USD/JPY dipped to lows below 99.25 before rebounding to the 99.45 area as tensions subsided.
The Euro-zone data releases did not have a major impact as Spanish unemployment was unchanged for August and there was a degree of tension ahead of Thursday’s ECB meeting with pressure for a dovish tone even though recent Euro-zone releases have been more encouraging.
The US data was stronger than expected with the ISM manufacturing index rising to 55.7 for August from 55.4 previously. This was the strongest reading since May 2011 and the second successive outcome above expectations. The components were also broadly favourable with a strong rise in new orders and a solid employment reading.
There was fresh optimism surrounding the US outlook and expectations that the Fed would taper bond purchases this month while risk appetite also improved on hopes for firmer global growth. The dollar registered fresh gains as USD/JPY pushed to a high above 99.80 while EUR/USD dipped below 1.3150 and tested the 200-day moving average at 1.3145.
The UK economic data was again stronger than expected with an increase in the construction PMI index to 59.1 for August from 57.0 the previous month. Residential activity continued to expand strongly and this was the highest reading since the fourth quarter of 2007. The UK data has been consistently strong over the past 2-3 months and confidence will be boosted further if there is a robust services-sector reading on Wednesday.
Sterling did briefly strengthen beyond 0.8450 against the Euro and GBP/USD spiked initially to 1.56 as gilt yields increased, but it was unable to sustain the gains as the US currency secured wider gains.