Given the markets start looking for the September cut, EUR could under the pressure in the near term. In contrast, AUD remain supported by the hawkish RBA as inflation remain the main concern for the economy.

EUR: Time to short?

During the last trading week, several Eurozone data points supported the case for the ECB to cut interest rates in its September meeting. Notably, Germany's Q2 GDP remained unrevised, showing a 0.1% q/q contraction. The breakdown revealed an unexpected decline in private consumption and capital investment, partially offset by high government spending. This contraction in private demand highlights the ongoing weakness in economic activity. Additionally, German consumer confidence saw an unexpectedly sharp drop, with deteriorating income and economic expectations. Inflation in the Eurozone also showed further cooling, reinforcing expectations for a rate cut. Specifically, Germany's headline CPI fell to 1.9% y/y from 2.3%, and Core CPI dropped to 2.0% y/y from 2.6%. Meanwhile, Eurozone headline inflation decreased to 2.2% from 2.6%, and Core CPI dipped to 2.8% from 2.9%. With a September ECB rate cut fully priced in, the key focus will be on whether President Lagarde signals that October will be a "live" meeting. Market pricing currently suggests a 50/50 chance between another cut and no action.

The released of the Final Eurozone's August PMI data further confirmed that the eurozone economy remain weakness and contraction. Although the final services PMI show some strength, but it primarily driven by the Paris Olympics rather than an underlying economic recovery and couldn't confirm the ‘Olympics Effect’ could last long or not. Additionally, a majority of ECB policymakers seem to agree on the need for a September rate cut, with many expressing that "it is reasonable to cut in September." As a result, given the current aggressive rate cut expectations in the market, it seems reasonable to maintain a bearish outlook on the EUR for the time being.

AUD: Hawkish RBA

The AUD continued to gain strength during the last trading week, supported by improving global risk sentiment and domestic data, notably the Monthly CPI. Australia's Monthly CPI came in at 3.5% year-on-year, slightly higher than the expected 3.4% y/y. The seasonally adjusted CPI also showed a 3.6% y/y rise, down from a revised 3.8%, while the month-on-month figure remained unchanged at 0.0%, compared to last month's revised 0.3%. The trimmed CPI y/y decelerated to 3.8% from 4.1%, and CPI excluding volatile items and travel fell to 3.7% from 4.0%. While the sub-measures indicate some deceleration, the overall CPI remains elevated, still above the RBA’s 2-3% target, but this data suggests that disinflation is underway. However, it’s important to note that the Monthly CPI does not directly reflect the Quarterly CPI, as it lacks the comprehensive data included in the quarterly figures, which the RBA prioritizes when setting policy. The RBA has indicated that it will look past the impact of rebates on inflation and focus on core inflation. As a result, despite some cooling measures, this data supports the RBA’s stance that it is too early to consider rate cuts, and the central bank will likely wait for the Q3 inflation data in late October, providing further near-term support for the AUD.

Meanwhile, Australia's July retail sales dropped to 0.0% m/m from 0.5% m/m, indicating that households remain under pressure from high inflation, with recent rises likely driven by mid-year sales activity. This suggests that July retail sales may not offer a clear picture but could confirm that the RBA might maintain its current rate longer rather than implement further hikes. From a policy perspective, the RBA remains concerned about inflation as per the most recent RBA communication and the above-forecast Aussie CPI. As a reminder, the RBA stuck to its hawkish tone in the latest gathering in which it reiterated that the Board remains resolute in its determination to return inflation to the target and is not ruling anything in or out, as well as reiterated that inflation remains above target and is proving persistent.

EUR/AUD 4H Chart

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