The Australian Dollar (AUD) witnessed a continued decline on Monday, attributed possibly to the Reserve Bank of Australia (RBA)’s conservative approach following its decision to maintain the interest rate at 4.35% on Tuesday. Speculations had been rife in the markets that the RBA might adopt a more aggressive stance, fueled by last week’s inflation data surpassing expectations.
Australia’s Treasury released a statement on Sunday, forecasting a potential return of inflation to the Reserve Bank of Australia’s (RBA) target range by the close of 2024. The December outlook from officials predicted a gradual decline in CPI inflation to 3.75% by mid-2024 and further to 2.75% by mid-2025, aligning with the RBA’s objectives.
The US Dollar Index (DXY), measuring the performance of the US Dollar (USD) against a basket of major currencies, continued its ascent as traders digested key economic data from Friday and cautious remarks from Federal Reserve (Fed) officials regarding possible interest rate adjustments. Nonetheless, the downward correction in US Treasury yields may curb the Greenback’s advance.
Investors in the United States (US) are primed to scrutinize crucial economic indicators this week, with focus on the Producer Price Index (PPI) slated for release on Tuesday, followed by the Consumer Price Index (CPI) and Retail Sales reports on Wednesday.
In the realm of market movers, the Australian Dollar’s depreciation persisted as the National Australia Bank’s Business Conditions dipped to 7 in April from the prior reading of 9, while Business Confidence held steady at 1. Treasurer of Australia, Jim Chalmers, hinted at optimistic developments during a series of television interviews on Sunday, suggesting that the upcoming budget aims to mitigate inflation rather than exacerbate it, while also easing burdens for individuals.
China’s Consumer Price Index (CPI) witnessed a year-on-year rise of 0.3% in April, up from 0.1% the preceding month, reflecting a gradual recovery in demand amid lingering economic fragility. Meanwhile, the Producer Price Index (PPI) sustained a downward trajectory, declining by 2.5%, marking the 19th consecutive month of deflation. Given the close trade relations between China and Australia, these figures could potentially sway the Australian market.
Neel Kashkari, President of the Minneapolis Federal Reserve (Fed), urged caution regarding the level of monetary policy restrictiveness, stating in an interview with CNBC that while the bar for another rate hike is high, it cannot be discounted entirely. Additionally, San Francisco Fed President Mary Daly emphasized the necessity of maintaining a prolonged restrictive policy to achieve the Federal Reserve’s inflation objectives.
The University of Michigan Consumer Sentiment Index plummeted to 67.4 in May from April’s 77.2, marking a six-month low and falling short of market expectations. Conversely, the UoM 5-year Consumer Inflation Expectation climbed to 3.1%, a six-month high, from the previous 3.0%.
The Commonwealth Bank of Australia (CBA) revised down its forecasts for the Australian Dollar at the end of 2024 to 0.69, down from the previous 0.71. CBA cited factors such as the interest rate gap and elevated US Treasury bond yields, which are bolstering the US Dollar. The Federal Reserve’s cautious stance on high inflation and reluctance to implement rate cuts further support the US Dollar, as reported on forexlive.com.
In terms of technical analysis, the Australian Dollar hovers around the psychological level of 0.6600, with the AUD/USD pair maintaining a sideways movement within a symmetrical triangle pattern. The 14-day Relative Strength Index (RSI) indicates a bullish inclination, remaining above the 50 level.
The AUD/USD pair may test the upper boundary near the swing area at 0.6650, with a breakthrough potentially prompting a retest of March’s high at 0.6667, extending gains toward the psychological barrier of 0.6700. Downside movement may find support around the 14-day Exponential Moving Average (EMA) at 0.6569, with further potential support near the lower boundary of the symmetrical triangle, approximately at 0.6465.
