Aussie dollar pops after RBA ends QE

The RBA has ended its pandemic era bond-buying, helping lift the hard-hit AUD/USD forex pair. Stocks are set for a positive start to the month despite very weak German retail sales.

• AUD rises as RBA announced end of QE, but cautions over rate hikes 
• DAX extends its rebound despite retail sales contracting 5.5%
• Global manufacturing PMIs in focus

After some wild swings across the month of January, European markets are set to kick off February in a calmer more upbeat fashion. Taking cues from a positive close on Wall Street, the likes of the FTSE, DAX and the CAC are all pointing to a stronger start.

Whilst a more hawkish Federal Reserve was responsible, in part, for last week’s volatility, which saw the Nasdaq experience daily swings in the region of 2-6%. This week the focus is on the RBA, the ECB and the BoE.

RBA keeps rates on hold, QE to end

Overnight the RBA voted to keep rates unchanged at 0.1%. However, the Australian central bank did end its pandemic era bond buying programme, as expected and also upwardly revised its forecast for inflation. 

Governor Philip Lowe was keen to tame market expectations surrounding a rate hike, cautioning that the end of QE doesn’t mean that interest rates will rise imminently. His comments saw traders reassess rate hike expectations, which initially had a negative impact on the AUD, although that was short lived. Yesterday, the Aussie dollar had outperformed major FX peers, settling 0.68% higher versus the US Dollar. Today, AUD/USD is once again extending gains thanks in part to the weaker US dollar.

DAX rises, retail sales slump

The DAX is heading firmly higher extending its rebound from the 2022 low of 14840 to 15580, as investors shrug off disappointing Germany retail sales data. 

Retail sales in the eurozone’s largest economy fell sharply by 5.5% MoM in December, well below the 0.6% increase in November and short of the -1.2% decline forecast. Sales tumbled in the final month of the year as COVID cases rose to record highs and consumers stayed away from the shops to avoid catching the virus. The data comes after GDP last week revealed that the German economy contracted in the final three months of the year as Omicron spread rapidly, supply chain disruptions continued, and inflation jumped to an almost 30-year high. 

Manufacturing PMIs

Looking ahead, manufacturing PMI for Europe, the UK and the US will be in focus. Manufacturing activity in the Eurozone is expected to rise, notably in Germany. Meanwhile, the US and UK are expected to show manufacturing activity growth slowed slightly, although remain comfortably above the 50 the level that separates expansion from contraction. In the US, the ISM manufacturing report, particularly the employment sub section, could well act as the first clues towards Friday’s jobs report.

Party gate report released, GBP rises 

The British pound is managing to push higher following the release of the watered-down Sue Gray “party gate” report. Prime Minister Boris Johnson has managed to cling onto power so far avoiding any leadership challenge, following its release, with ministers opting to bide their time to see what the Met police investigation unveils. 

GBP/USD is extending gains for a second day, heading back up towards 1.35, after rising from a low of 1.3380 yesterday.