AUD finds support as Bank of England comes to the Rescue

Key Movers

Turmoil enveloped currency markets through trade on Wednesday, prompting wild price action and elevated volatility across major currencies. Risk appetite plumbed new lows through the Asian session as investors chased haven assets amid a souring demand for risk. The UK was again the epi-centre as market fears that rapidly rising UK gilts would prompt a 2008-style financial crisis drove investors toward haven assets. The pound fell to intraday lows at £1.0550 while the euro appeared set on consolidating a break below €0.96, touching €0.9539. Amid concerns the UK credit crunch would begin impacting broader credit conditions, the Bank of England stepped in to defend the debt market. Policy makers announced a short-term program of long-date UK gilt purchases. The effect was instant, with UK rates turning lower and the GBP surging higher. Having moved through £1.09, the GBP has steadied and currently buys £1.0880. Buoyed by the recovery in the GBP and a normalisation across the UK rates market, the euro surged back through €0.97, finding added support in more hawkish commentary from key European Central Bank officials. The push for a 75-basis point rate adjustment at the October meeting continued to gather momentum and helped the Euro mark new intraday highs at €0.9750.

Our attentions remain on the UK and unfolding performance across the rates market while German inflation data headlines the macroeconomic ticket. With annual price pressures expected to extend beyond 10%, a surprise to the upside could drive calls for a supersized 100-point European Central Bank rate adjustment.