Australian Dollar Tad Softer After GDP; Is AUD/USD About to Reverse This Week’s Gains?

AUD/USD, Australian Dollar, RBA, GDP – Talking Points:

• The Australian economy grew slower than expected in the first quarter.
• RBA’s Lowe highlights “significant risks” to a soft landing.
• What then Australian dollar / US dollar?

The Australian dollar was softer against the US dollar after the Australian economy grew more slowly than expected in the first quarter of the year.

The economy grew 2.3% year-on-year in the January-March quarter, compared to an expected 2.4%, slower than 2.7% in the fourth quarter of 2022. Growth marks the sixth consecutive increase, although it has undoubtedly slowed in recent quarters with explosive growth . 400 basis points increase in interest rates start to flow through the economy.

Reserve Bank of Australia (RBA) Governor Philip Lowe acknowledged the risk of a more pronounced slowdown in the economy, saying the path to a soft landing was narrow and “significant risks” to the outcome at a conference in Sydney on Wednesday.

5-minute chart of the AUD/USD currency pair

Chart created using TradingView

The Reserve Bank of Australia unexpectedly raised interest rates by 25 basis points at its meeting on Tuesday, taking the benchmark interest rate to 4.1%, and leaving the door open for further tightening in its determination to bring inflation back to its target.

Inflation is expected to return to the top of the RBA’s target range of 2-3% by mid-2025, and a higher minimum wage could delay achieving the rate target. Lowe reinforced the central bank’s resolve to continue to raise interest rates if necessary to ensure inflation returns to its target range even if it pushes the unemployment rate higher than its lowest levels in five decades.

GDP growth in Australia

Source data: Bloomberg; The graph is prepared in Excel

Headline inflation rose 6.8% year-on-year in April and 7.0% in the first quarter, down moderately from a peak of 7.9%. Prior to Tuesday’s meeting, the market was expecting the benchmark interest rate to reach 4.18% by September, but now the odds are high for an RBA rate hike of 25 basis points, with the final rate expected at 4.32% by the end of the third year. a fourth.

The main focus now is on Chinese trade data due out later in Asia on Wednesday morning. Imports in the world’s second-largest economy are expected to contract 8% year-on-year in May, after a 7.9% drop in April. Earlier this month, factory activity contracted faster than expected in May on weaker demand, clouding the outlook for the economy, Australia’s largest export destination, however, reports that China is working on new measures to support the property market Hopes of targeted stimulus have revived the economy.

AUD/USD 240 minute chart

Chart created using TradingView

On the technical charts, AUD/USD’s break towards the end of last week above resistance at the May 30 high of 0.6560 relieved immediate bearish pressure, which could lay the groundwork for a renewed bullish turn. However, AUD/USD needs to breach the crucial barrier at 0.6805 for the bearish backdrop to reverse. The immediate barrier is at the mid-May high of 0.6675, coinciding with the 200-day moving average.

– Posted by Manish Grady, Strategist for DailyFX.com

Connect with Jaradi and follow her on Twitter: @JaradiManish