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Forex: The declining rate debate

At the start of the year the debate was centred on when the major central banks (principally the UK and US) would start raising interest rates, despite the fact that many central banks were easing. But the reality has proven to be very different. There has been a second Fed governor yesterday saying that the Fed should not raise interest rates this year (Tarullo) and the market views this as the more likely outcome from the two remaining Fed meetings of the year. With headline inflation having fallen below zero yesterday, the UK is in even less of a hurry to increase rates, with the focus today on the labour market data, where some signs of slowing have been seen of late. Sterling saw more weakness against the resurgent single currency yesterday, EURGBP moving up to levels last seen early Feb of this year. The bottom line is that the interest rate story is becoming less relevant for the major currencies and is also reducing overall volatility.

Elsewhere the Aussie has continued to weaken overnight on the back of the recent strong rally, briefly down to the 0.72 level. Australia’s second large bank (Westpac) increased mortgage rates overnight combined in a capital raising package, which did put some downward pressure on the currency given the risk that other bank follow through on this and make an interest rate cut from the central bank a bit more likely at the margins. We’ve also had comments from New Zealand central bank head Wheeler, again re-iterating the scope for a further interest rate cut should conditions allow. The kiwi was initially weaker on the news, but managed to recover losses towards the end of the Asia session.

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