The Australian dollar sagged on Wednesday as weakness in Chinese equities amplified concerns over slowing growth in China, while sterling held firm after a pick up in UK inflation kept prospects of a Bank of England rate hike in play. Moves among major currencies were mild, however, as investors awaited US inflation data and the minutes of the Federal Reserve's July meeting due later in the day for clues on when the Fed will start raising interest rates.
The US dollar eased 0.2 percent against a basket of major currencies to 96.861, taking a breather after having risen over the past several sessions. Against the yen, the dollar held steady at 124.35 yen The euro rose 0.3 percent to $1.1050, inching away from a one-week low near $1.1016 that had been set on Tuesday. "There doesn't seem to be any striking factors. There is probably some short-covering ahead of the events coming up tonight," said a trader for a Japanese bank in Singapore, referring to the euro's rise versus the dollar.
Economists polled by Reuters forecast US consumer prices rose 0.2 percent in July from a month earlier, a shade less than 0.3 percent in June. "Another uptick in the US Consumer Price Index may spark a sell-off in EUR/USD as market participants ramp up bets for a Fed rate hike at the September 17 interest rate decision," said David Song, currency analyst at DailyFX. "However, the renewed decline in oil prices may drag on the CPI, and a dismal print may undermine the Fed's ability to achieve the 2 percent target for price growth amid the disinflation environment across the major industrialised economies."
The Australian dollar struggled as Shanghai shares fell again on Wednesday after sliding more than 6 percent on Tuesday. The Aussie, which is often used as a liquid proxy for China plays, eased 0.1 percent to $0.7333 and touched a one-week low of $0.7314 at one point. Sterling held steady at $1.5669. It had set a seven-week high of $1.5717 on Tuesday after UK inflation data bolstered bets that the Bank of England will raise interest rates in coming months.
Data on Tuesday showed British consumer prices rose in July and core inflation hit a five-month high, prompting investors to bet on the BOE moving slightly faster than previously expected once it starts raising interest rates. "Further upside surprises in core inflation prints (in particular services inflation) are likely to make the hawkish members more comfortable in pulling the trigger for voting for a hike," Credit Suisse analysts wrote in a note to clients.
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