US Dollar, Japanese Yen on the Defensive as Risky Assets Rebound

Key Overnight Developments

• Australian Dollar Unmoved as RBA Confirms Flat Rate Hike Outlook
• Euro, British Pound Rise on Broad US Dollar Weakness in Asian Trade

Critical Levels

The Euro and the British Pound edged higher in overnight trade, adding 0.2 and 0.1 percent respectively against the US Dollar, with the greenback broadly weaker as currency markets continued to digest last week’s sharp upswing. We remain flat EURUSD and GBPUSD.

Asia Session Highlights

Minutes from Augusts’ Reserve Bank of Australia showed the central bank sees current interest as “still appropriate” given increased uncertainty in the global outlook as well as cooling in the domestic housing market. The RBA noted a higher savings rate and lower credit growth, saying households remain cautious in their spending, but spun this into a welcome counterbalance to the boom in mining exports vis-à-vis the net impact on inflation. On balance, policymakers said they were “comfortable” with the existing level of benchmark borrowing costs, reinforcing expectations that monetary tightening was over for the time being. As much had been priced in even before the rate decision however after CPI figures disappointed in the second quarter, with the Australian Dollar yielding a reasonably muted reaction to today’s release.

Euro Session: What to Expect

UK Consumer Price Index figures headline the economic calendar, with expectations calling for a 0.2 percent decline in July to bring the annual inflation rate down for the third consecutive month to 3.1 percent, the lowest since February. The outcome may not prove particularly market-moving however considering it offers little new information to shape traders’ outlook on the direction of monetary policy, only serving to reinforce the central bank’s well-publicized sanguine view on inflation.

Germany’s ZEW Survey of investor confidence is in focus on the continent, Expectations call for the forward-looking Economic Sentiment gauge to drop for the fourth consecutive month in August, an outcome that seems hardly surprising considering the headwinds facing economic growth in the currency bloc as its member governments push ahead with deficit-cutting measures including tax hikes and spending cuts as well as step up bond issuance.

On balance, risk sentiment remains the dominant driver for the Euro and the British Pound. With that in mind, the path of least resistance for both European currencies as well as most of their major counterparts points toward near-term strength against the safety-linked US Dollar and Japanese Yen with US stock index futures trading 0.3 percent higher in late Asian trade and pointing to fading risk aversion.

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com