Inflation and Trade Data Put the EUR in Focus, with an Eye Needed on the GBP

Earlier in the Day:

There were no material stats released through the Asian session this morning, leaving the markets to focus on news from the weekend the mid-year economic and fiscal outlook report (MYEFO) out of Australia and what lies ahead for the week.

For the Aussie Dollar, the MYEFO report was a positive, with a struggling Australian coalition government now on the precipice of delivering a surplus for the financial year 2019/20, after bringing the 2018/19 forecasted deficit down from a budget forecasted A$14.5bn to just A$5.2bn. Forecasts are for a surplus of A$4.1bn for FY2019/20.

Throwing in tax cuts, an extended growth cycle in the Australian economy and unemployment levels down at 2012 lows, it’s not all bad for a government behind early in the opinion polls. The report also reflected an unspent allocation of an additional A$10.8bn for future expenditures that could also include further tax cuts in the New Year to support household spending and offset bruising household debt levels.

The latest MYEFO report comes as the latest polls show the ruling coalition party is sitting 10 points behind the Labour Party, with the federal elections slated for next May.

There are some negatives to take the shine off the coalition government’s latest achievement, with a stark warning from the OECD for Australia to make contingency plans for a severe collapse in the housing market. A collapse would certainly bring into question whether Australia would be able to enjoy a 28^th consecutive year of economic growth, a housing collapse together with a combination of a material slowdown in the Chinese economy and slide in coal and iron ore prices induced by the U.S- China trade war a final nail in the coffin.

The RBA has continued to sit on its hands, from a policy perspective and even talked of the possibility of a rate cut down the road. This comes as the OECD requests for rates to be raised to limit further imbalances accumulating, which could be just at the wrong time for the RBA, with global economic indicators beginning to show patches of red, largely attributed to the U.S – China trade war.

Rising rates would certainly eat into household disposable incomes and weigh on consumer spending and further government tax cuts may not be enough to offset the combined effect of rising rates and falling house prices on consumer sentiment that may ultimately hurt the coalition government and the Aussie Dollar as a result.

The Aussie Dollar moved from $0.71765 to $0.7172 upon release of the MYEFO report, before rising to $0.7178 at the time of writing, a gain of just 0.08% for the session.

Elsewhere, the Japanese Yen stood at ¥113.548 against the U.S Dollar, a loss of 0.08% for the session, with the Kiwi Dollar also in the red, down 0.04% to $0.6794.

The Day Ahead:

For the EUR, economic data scheduled for release is limited to November inflation figures and October trade data out of the Eurozone. While any softer annual rate of inflation numbers will likely hit the EUR, there will likely be a greater sensitivity to the trade data, any narrowing to the trade surplus being another alarm bell for the economy.

Any upbeat numbers may have a relatively muted impact on the EUR. Concerns over the Eurozone economy and outlook may well pin back any EUR rally in response to the numbers.

Forecasts are skewed to the negative for the EUR on the inflation numbers. Outside of the numbers, a full circle by the Italian coalition government on its 2019 budget will provide some support to the EUR, though with the ECB seeing downside risk to the economy next year, it may not be enough for the EUR.

At the time of writing, the EUR was up 0.05% to $1.1312, with today’s stats the key driver today.

For the Pound, while it’s a quiet start to the week on the data front, with no material stats scheduled for release through the day, Brexit chatter will more than likely have an influence through the day.

With the British PM and the EU locking horns at last week’s EU Summit, will Theresa May take the deal to a parliamentary vote to sink it? The threat was made and there is a chance of a vote this week that could see the Pound take another hit.

One possible line of support could come from the rumour mills, with talk of a second vote on membership with the EU doing its rounds.

At the time of writing, the Pound up 0.01% to $1.2584, with Brexit chatter the key driver today.

Across the Pond, it’s a relatively quiet day on the data front, with key stats scheduled for release limited to the NY Empire State Manufacturing Index numbers for December.

Forecasts are Dollar negative, though direction for the Dollar won’t just be hinged on the stats, with sentiment towards policy ahead of this week’s FED decision also there to consider, along with Trump and trade war chatter.

At the time of writing, the Dollar Spot Index was down 0.03% to 97.414.

For the Loonie, economic data is limited to October foreign security purchases, which are unlikely to have a material impact on the day. Pressure on the Loonie remains, with crude oil prices having taken a hit of late and the BoC taking a more dovish outlook on the economy.

The Loonie was up 0.04% to C$1.3378 against the U.S Dollar at the time of writing.

This article was originally posted on FX Empire

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