ISM Beats, RBA Decision Looms

The US dollar failed to make any headway on the strong ISM service sector report since February. The yen was the best performer while EUR and NZD lagged. The Reserve Bank of Australia is expected to cut interest rates later today.

The ISM non-manufacturing index jumped to 56.0 in July compared to the 53.0 expected, matching the highest reading this year. New orders were strong but employment slightly weaker, giving some confirmation to Friday's ho-hum jobs report.

USD/JPY rose to a session high of 98.77 following the report but the knee jerk higher marked the top for the day and the pair drifted to 98.25 later. Similarly, EUR/USD fell to 1.3232 but couldn't go any lower and rebounded to 1.3263. The dollar also failed to gain after the Fed's Fisher commented that the FOMC is now closer to tapering.

Throughout the session, the market lacked any strong bias. EUR/CHF drew some interest as it slid below 1.23 to the lowest in a month.

In the hours ahead, attention will focus on the Australian dollar. Up first is the June trade balance report at 0030 GMT with expectations for a A$800 surplus. At the same time, the house price index for Q2 is expected up a modest 3.0% y/y.

The main event is at 0430 GMT when the RBA announces its decision on rates. The OIS market is implying a 91% chance of a cut and 26 of 27 economists surveyed by Bloomberg forecast expect the same.

A failure to cut rates, although unlikely, would send AUD traders scrambling to cover and AUD/USD would likely to gain more than 200 pips. A cut would elicit a much smaller reaction and the focus would turn to the statement and any potential bias toward more cuts.