Australian Dollar Off Lows After CPI; What’s Next for AUD/USD?

AUD/USD, Australian dollar – price action:

• Australia economic inflation It fell from the previous quarter, but slowed less than expected.
• Persistent price pressures leave the door open for further RBA tightening.
• What then Australian dollar / US dollar?

The Australian dollar regained initial losses against the US dollar after released data showed that Australian price pressures remain stubbornly high, keeping the possibility of further tightening by the RBA.

Australian CPI rose to 7% yoy in the January-March quarter, versus 6.9% expected from 7.8% in the previous quarter, and well above the central bank’s target range of 2%-3%. Consumer price index rose 1.4% qoq vs 1.3% expected, down from 1.9% in the previous quarter. The trimmed average slowed to 1.2% qoq from 1.4% expected vs. 1.7% previously. The slow deceleration of inflation towards the RBA target suggests that it may be too early to end the tightening cycle. The market is now pricing in RBA cash at 3.81% by August (vs 3.6% now), up from 3.72% just before the CPI data.

Australian inflation and economic surprise index

Source data: Bloomberg; The graph is prepared in Excel

The Reserve Bank of Australia left interest rates unchanged at its meeting earlier this month saying it wanted additional time to assess the implications of previous rate hikes for the broader economy, but left the door open for further tightening. “It was important to be clear that monetary policy may need to be tightened at subsequent meetings,” said the minutes of the RBA meeting on April 4.

The minutes showed that the board members considered the issue of another 25 basis point increase as inflation remained “very high and the labor market was very tight”. The board also considered the faster-than-expected recovery in population growth and wage growth before choosing to pause the price hike.

5-minute chart of the AUD/USD currency pair

Chart created using TradingView

Australian economic data has fallen in recent weeks, as the Economic Surprise Index shows. The labor market has been tight with the unemployment rate hovering around a five-decade low, but signs of moderation in the labor market are emerging. Developments abroad (including recessionary risks in the US and credit market tightening as a result of stress in the banking sector) increase downside risks to the outlook.

Daily chart of the Australian dollar / US dollar

Chart created using TradingView

On the plus side, macroeconomic data from China has beaten expectations in recent weeks, prompting analysts to raise expectations for the world’s second-largest economy for 2023. Given that China is Australia’s largest export market, any improvement in China’s growth outlook could To boost the growth of Australia. horizons. In short, unless risk appetite contracts, from a macro perspective things seem to be evenly balanced for AUD/USD for now.

On the technical charts, AUD/USD has been consolidating in a tight range lately, with the downside capped at the March low of 0.6550, while the upside has been capped under a hard cap around the 89-day moving average. , which roughly coincides with early April. The highest level is 0.6795. On the downside, immediate support is found at 0.6625. AUD/USD needs to cross the upper edge of the range for the outlook to become constructive.

– Posted by Manish Grady, Strategist for DailyFX.com

Connect with Jaradi and follow her on Twitter: @JaradiManish