Australian Dollar Dented by Inflation Data + RBA Governor Lowe's Comments

Pound Sterling has risen against the Australian Dollar by over half a percent in the mid-week session to reach A$1.6499 as data out of Australia disappoints against analyst expectations.

The Aussie came under broad-based selling pressure after inflation grew at a slower-than-forecast rate in the second-quarter of 2017.

"AUD is the worst-performing currency overnight on softer than expected Q2 CPI data," says Elsa Lignos, Global Head of FX Strategy at RBC Capital Markets in London. "That is likely to temper consumption and add to a number of challenges for households."

Analysts had forecast quarterly inflation to read at 0.4%, instead it only rose by 0.2%.

Annualised inflation has fallen to 1.9%, analysts were expecting a more robust 2.2% reading.

Inflation is decelerating and is now below the 2% level targeted by the Reserve Bank of Australia.

In short, this suggests the RBA’s case for raising interest rates in the near-future has been undermined.

Recall the Australian Dollar has been one of the best-performing major currencies over recent weeks thanks to traders betting that the RBA would look to raise interest rates in the near future.

However, there is a risk that markets read too much negativity in the data.

It must be pointed out that core inflation pressures have stabilised and even nudged a touch higher. Core inflation is that inflation generated by wages and overall economic activity as the impact of global factors - such as fuel costs - are stripped out.

Core inflation rose 0.5% in the second quarter.

As such, Jo Masters at ANZ Research believes “the RBA would likely be encouraged by these data”.

ANZ continue to see policy on hold, but “the balance of risks – which we previously saw as tilted to the downside – look to be becoming more balanced.”

It’s not over for the AUD bulls just yet.

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Lowe in No Rush to Raise Rates

The declines in AUD were exacerbated by RBA Governor Lowe who underpinned the view that Australia’s central bank is under no pressure to raise interest rates in a speech delivered to the Anika Foundation.

The turn in the monetary policy cycle in many countries has, “no automatic implications for monetary policy in Australia,” says Lowe, citing recent moves by the Bank of Canada where rates were raised earlier in the month.

Lowe spoke in detail about low wages growth and noted that, although there was a possibility for some quick catch-up, there was a “low probability” of this happening in Australia.

In the Q&A session he also acknowledged that if wages growth averages only 2%, “we won’t get back to 2.5% inflation.”

He also emphasised the flexible framework that the RBA now uses, with the inclusion of a financial stability objective, noting that developments in household balance sheets have had a “bearing on the setting of monetary policy.”

“Overall, Lowe’s speech suggests to us that the RBA is comfortably on hold and likely to remain there until some of the spare capacity reduces in the labour market, with developments in the housing sector and household balance sheets likely to continue to be an important part of monetary policy deliberations,” says Felicity Emmett, Senior Economist at ANZ Research.