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Let’s make things very clear – Australia’s inflation rate is plateauing in fact I would argue it’s starting to reaccelerate in areas Australia can least afford. From a trading and momentum perspective this needs explaining. Stronger Than Expected Print April's CPI data exceeded expectations and was at the very top of the surveyed range.

Headline CPI increased by 3.6% YoY, well ahead of the consensus of 3.3% YoY. Seasonally adjusted, the increase was even higher at 3.8% YoY. Both the headline and core CPI rose for the third consecutive month.

This is a major concern. Now, the monthly increase slowed sequentially to 0.2% MoM, annual headline inflation has risen every month in 2024. Then the RBA’s core: trimmed mean inflation rose from 4.0% to 4.1%, and the ex-volatiles measure increased from 4.1% to 4.2%, with a three-month annualized rate of 5%, there is clear daylight between the RBA’s target band of 2%-3% and the core measure of inflation Here is the chart of the three main figures.

Monthly CPI Indicator annual moment (%) All this makes the RBA’s ‘narrow path’ almost unattainable. A point not lost on the AUD and the ASX as seen by each one’s initial reactions. ASX 200 v AUD/USD Source: Refinitiv Broadening Persistence However, with the passage of time the data is throwing up bigger concerns – and that is the persistence of price pressures in areas that make up large parts of the CPI basket.

The expectation for a weaker April CPI print was based partly on the skew towards goods in the sampling for the first month of the quarter which have been in structural decline. However, both goods and services contributed to the rise. Notable increases were seen in categories such as: Fruit and vegetables: from -1.2% YoY to 3.5% YoY Apparel: from 0.3% YoY to 2.4% YoY, with a 4% MoM increase Healthcare: from 4.1% YoY to 6.1% YoY The upside surprise was mainly due to significant increases in volatile expenditure items, including: Fruit: +7.3% MoM Oils and fats: +4.6% Women's garments: +4.5% Children's garments: +6.8% Accessories: +3.6% Furniture: +3.3% International holiday travel and accommodation: +11% These items constitute 7.5% of the CPI basket and largely explain the forecast miss.

Then you have clothing, which was expected to fall by 0.4%, rose by 4.1%. Furnishings, household equipment, and services, expected to be flat, all increased by around 0.6%. Recreation and culture, predicted to rise by 0.8%, actually went up by 2.3% in April.

This point was not lost on the Bond market with both the 3-year and 10-year Australian bonds surge on the data seen here: Australian 3-yr and 10yr Bond reactions Source: Refinitiv (Blue 3-year, White 10-year) Goods Prices Acceleration You can certainly explain away the volatile items as being affected by the early Easter period and a correction in the March data that had these items under pressure. But that ignores the seasonal and 3- and 6-month averages which are still high. You can also ignore the volatile international travel and accommodation sector, which accounted for much of the forecast miss, but again you can’t ignore the acceleration in goods prices where deflation was expected.

Categories such as clothing & footwear, furniture, and other major household and electronic appliances, typically measured once per quarter, suggest that goods inflation will likely remain strong. The monthly measurement of goods inflation rose by 0.9% in April, adding 0.2 percentage points to the headline monthly CPI, marking the largest increase since April last year. Services Inflation – the ‘sticking’ point One of the floors with the April CPI print is that is was heavy on goods prices but light on services.

This will be reversed in May - services prices are expected to remain fairly sticky. These are the areas the media like to quote like dentists and hairdressers. But somewhat cheapens the services that do move the dial, rents, telecommunications, financial service and insurances etc. these are big components of the CPI basket.

Considering the upside miss in April and the anticipated persistence of services inflation in May and June, the consensus now for Q2 headline CPI has been upwardly revised to 0.9% QoQ (range of 0.6% to 1.2%), that implys an annual reading of 3.7%. For core inflation (trimmed-mean), it has been adjusted to 0.8% QoQ, implying an annual reading of 3.8% - which is in line with the RBA’s new forecast. Implications for the RBA The implications from this CPI print will challenge the Reserve Bank of Australia (RBA).

It does pressure its assumption that the re-acceleration in inflation in Q1 would quickly revert. The unexpected strength in goods in particular coupled with sticky services suggests more persistent inflationary pressure than initially anticipated. It also shows that ‘inflation psychology’ is real – there is an argument to be made that spending has maintained on the ‘idea’ cuts would come because inflation is falling.

Which has left enough demand in the economy to hold inflation up. So, does this imply the RBA is about to raise rates? Here is the market’s pricing on that idea.

Interestingly enough despite the hawkish risks, the likelihood of the RBA hiking rates is still tempered in the market and explains why the AUD in the hours since the CPI has moderated. Why? Emerging signs of activity weakness.

Retail sales have been weak, corroborated by several companies reporting soft trading updates. Then there was Q1 construction work done which was released at the same time as the CPI data - significantly missed expectations (-2.9% QoQ versus the expected 0.5%) that is a huge miss. Things the RBA will be watching over the coming week is the Fair Work Commission's Minimum Wage decision on Monday and the Q1 GDP release next Wednesday.

These events will be crucial in assessing the broader economic outlook and potential RBA policy responses. Anything that has an upside surprise should be seen as a AUD positive and an index negative. The RBA will likely need to jawbone this result to further slow household demand for non-essential items, which is way we highlight the ‘inflation psychology’ term and the effect ‘anticipation’ is having.

However, as the market and economist point out it is unlikely that the RBA will increase interest rates again, as this would disproportionately impact households already struggling under tight financial conditions. Thus – we are stuck in this weird holding pattern and as other central banks around the world begin to cut rates it will attract flows to the AUD and its higher yields. There is a silver lining here too – as countries cut due to their respective disinflation moves and thus cheaper imports, this will benefit Australia’s inflation problem but that is a way off and the AUD will remain attractive for a while to come.

The USD saw decent strength in Wednesdays session, with The US Dollar Index (DXY) rising from an open of 104.67, pushing through the resistance at 105 to hit a high of 105.14 on the back of firmer US Treasury yields. Despite this rally DXY is heading into the end of the month looking to have its first monthly decline since December 2023. Ahead today we have US GDP as well as several Fed speakers, including Williams at the Economic Club of NY.

JPY declines against a resurgent USD with rising US yields pushing the US10Y-JP10y rate differential higher. USDJPY remained above 157.00 and pushing to a high of 157.74 and back in the April intervention zone. Remarks from BoJ Board Member Adachi, who stated that if excessive Yen falls are prolonged and expected to affect the achievement of the BoJ's price target, responding with monetary policy becomes an option, failing to help the Yen significantly.

AUD, and to some extent NZD, saw some short lived strength after a hotter than expected Aussie CPI reading in the APAC session. This strength did fade in the UK and US session with both the AUD and NZD currencies resuming their weakness, tracking risk appetite. AUDUSD just holing above the psychological 0.66 level heading into Thursdays APAC session.

We know that this is slightly contrary to the consensus views but we think it needs to be said. The communication from the RBA (Reserve Bank of Australia) is unusually unclear, confusing and conflicted. The view conveyed in statement, press conference and minutes currently we would argue counter each other.

And the reason for this we believe is because the RBA is a reluctant hawk and is frightened to act. Let us now present why we think this and what it will mean for FX and yields in particular. The RBA has just completed a mass review of its operations and one of the key changes was to improve transparency.

This included press conferences, extended meetings, and more public discussions from members. The catch with this has been the mixed communications. Take for example the statement which was extremely ambiguous.

It was filled with terms like uncertainty, mixed signals, and complexity. It explains why the statement has this line: ‘the path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.’ That’s fair – things are complex and we understand why the board is waiting for more data. That was countered with this: ‘ The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.’ Historically, whenever the Board has included such a resolute statement in its communications, they followed up with a cut or a hike in the preceding meetings – the frightened hawk is there and strongly suggests that a rate hike is likely.

The initial AUD reaction to the statement we think shows why the communication is mixed. Then take the press conference – Governor Bullock’s were much stronger than the statement, indicating a significant stance, not really clear in the statement. As mentioned, the Board stated they are not ruling anything in or out, but in reality, they have dismissed the possibility of rate cuts.

That was confirmed when Bullock was asked on this exact point and confirmed that rate hikes were the only things discussed. There was no ongoing discussion about cuts in the near or medium term as they do not expect inflation to reach their target by mid-2026. The Board’s concern is that inflation is notably higher than expected, employment is solid and that overall demand is still generating inflation.

The reaction to all this was clear here: The next notable reaction was the interbank market. All though it doesn’t appear like much in this chart. Please understand this change is actually from a ‘cut’ to ‘hike’ so yes there is a 10% chance of a hike, that is from a 10% chance of a cut.

July will be crucial with substantial data releases, including the second quarter CPI (July 31), GDP figures, and the wage price index. Current forecasts suggest that inflation and employment are performing better than expected, raising concerns about the need for a potential harder landing in the economy to return inflation back to target. The focus is now shifting towards slowing down the economy further despite the per capita recession because in the RBA’s view the impact on the household’s price power in the future from high inflation is still too high.

Future Rate Decisions All things being equal – with the RBA turning itself in knots and trying so hard to stay the course the RBA's commentary suggests it still has preference to hold rates if possible. The big issue as it acknowledges is the possible need for near term tightening due to a lack of progress towards inflation targets. Here is the market’s forecast for rates post the meeting on Tuesday Which probably explains the AUD/USD reactions in the following 24 hours It flatlined – thus the market is telling us that it needs a catalyst, and those catalysts are clearly coming in July.

So to finish what’s the key? A significant upside surprise in the RBA's core inflation measure could lead to a rate hike, despite slowing demand and labour market conditions. We get the monthly inflation data next week, this will be the first strike then the July 31 quarterly read.

This will be huge and will be the biggest AUD mover outside of an RBA meeting. We will be providing as much information on this release the closer we get to the release. However as shown the RBA is a terrified hawk and without this inflation beat, the risk of further tightening diminishes, with expectations for the RBA to remain on hold until potentially the first rate cut in February 2025.

The next RBA meeting on August 6 it’s going to be an interesting 6 weeks for AUD traders ahead of what is a likely live event.

The European Central Bank (ECB) is set to announce its interest rate policy this Thursday. Market participants are widely expecting the rate to remain on hold, but most importantly, the “language” and the “tone” of the statement will be closely watched. It is unlikely that there will be any surprises from the ECB policy meeting and they are expected to maintain the current guidance about ending bond purchases and keeping rates on hold.

Despite being mostly uneventful, it should stay on the Euro traders radar as policymakers have been slightly more hawkish on the underlying inflation pressures recently and some have even highlighted the possibility of bringing forward the timing of the first rate hike. The growing uncertainty around the Italian budget and fiscal position will be the main significant issue that investors will be keen to watch. This week, the European Commission officially rejected Italy’s budget proposal.

The proposal of the deficit is definitely below the 3% EU deficit ceiling, but the EU was hoping that Italy will curb its massive debt given that they are the second largest public government debt pile in Europe after the Greeks. The debt to equity ratio in Italy currently stands at 131.81% of its GDP, and market participants are concerned on the country’s ability to repay its debt. European leaders have ramped up pressure on Italy over its public spending plans and gave unprecedented warnings.

Source: National Institute of Statistics All eyes will, therefore, be on the President Draghi’s comments on Italy’s budget woes to gauge the thoughts on the developments in Italy and the possible effects it may have on the Eurozone economy. Investors will also closely watch how the ECB is balancing the “external” risks that have become more prominent over the coming months: Threat of protectionism Vulnerabilities in the emerging markets Financial Market Volatility

The Bank of England on the 3 rd August, will announce whether they will increase, decrease or maintain the key interest for the United Kingdom. In this article we will look ahead with some industry experts and see how the UK economy performed last quarter. Who decides the rates?

Interest rates are set by the Bank of England’s Monetary Policy Committee which is made of nine members – The Governor, the three Deputy Governors for Monetary Policy, Financial Stability and Markets & Banking, the Banks’s Chief Economist and four external members appointed directly by the Chancellor. Expectations According to Bank of England’s Deputy governor Ben Broadbent it is unlikely that the current interest rate of 0.25% will be raised on 3 rd August as the directions of the UK economy remains unclear. Mr Broadbent is a close ally to the Bank of England governor Mark Carney, who in a recent interview said he was not ready to raise interest rates. “In my opinion, it is a bit tricky at the moment to make a decision (to raise the interest rates).

I am not ready to do it yet”. Bank of England rate history in the last 10 years [caption id="attachment_57430" align="aligncenter" width="445"] Source Bank of England[/caption] Economy The UK GDP (Gross Domestic Product) was estimated to have increased by 0.3% in Quarter 2 (April to June) 2017. The growth in Quarter 2 was driven mainly by services, which grew by 0.5% compared to 0.1% growth in Quarter 1 (January to March) 2017.

The largest contributors to growth in services were retail trade and film production and distribution. Construction and manufacturing were the biggest downward pulls on quarterly GDP growth after two consecutive quarters of growth. GDP per head was estimated to have increased by 0.1% during Quarter 2 2017. [caption id="attachment_57414" align="aligncenter" width="600"] Source: Office for National Statistics[/caption] Financial Markets The Pound The Pound has been at a steady level for the past few weeks, on 16 th July reaching its highest level against the US Dollar since September 2016.

Most experts predict the rates to remain at the same level in the upcoming Bank of England meeting. The markets would have priced in the outcome already. [caption id="attachment_57416" align="aligncenter" width="600"] GBP/USD Source: Go markets MT4[/caption] Since reaching record highs back in May, the FTSE100 has remained around the same level with no major movement in the Index in the recent weeks. [caption id="attachment_57417" align="aligncenter" width="600"] FTSE 100 Source Go Markets MT$[/caption] Remaining Monetary Policy Committee meeting dates in 2017 The New Note On 18 th July 2017, the Bank of England unveiled the new £10 note which will be issued on 14 th September 2017. The £10 note which features author Jane Austen, will be larger than the new £5 note but smaller than the current £10 note and will is made of plastic and has traces of animal fat.

Speaking at Winchester Cathedral, the resting place of Jane Austen, the Governor Mark Carney said “Our banknotes serve as repositories of the country’s collective memory, promoting awareness of the United Kingdom’s glorious history and highlighting the contributions of its greatest citizens”. [caption id="attachment_57421" align="alignleft" width="435"] The New Ten Source Bank Of England[/caption] The new £10 note celebrates Jane Austen’s work. Austen’s novels have a universal appeal and speak as powerfully today as they did when they were first published. The new £10 will be printed on polymer, making it safer, stronger and cleaner.

The note will also include a new tactile feature on the £10 to help the visually impaired, ensuring the nation’s money is as inclusive as possible. By: Klavs Valters GO Markets

The recent USD decline stalled in yesterday’s session with FX traders seemingly taking the view that there is not enough thrust from US data to justify a significantly weaker USD just yet. Aside from the inflation aspect – and markets may have reacted a bit too optimistically to the CPI and PPI – jobless claims also eased back yesterday to 222k after a jump to 232k one week ago, mirroring the January reading where they reached 225k but then dropped back to the 200-210k area. GBP under pressure EURGBP has come off its 0.8610 peak in the past couple of sessions with a strong equity market benefitting the more cyclical and risk sensitive Pound Sterling.

At the same time, volatility in the pair seems to be abating ahead of the key CPI figures in the UK next week. Risks are skewed to the dovish side for the Bank of England, and a move higher in EURGBP is a good chance as traders increase their bets on a June rate cut. Today, the key event for GBP traders is a speech by the BoE’s Catherine Mann, who is considered the MPC’s most hawkish member.

Yesterday, Megan Greene echoed the recent cautious optimism on inflation expressed by Governor Andrew Bailey at the latest meeting.