The Australian Dollar (AUD) weakened against the US Dollar (USD) on Wednesday following the release of mixed Consumer Price Index (CPI) data, shedding light on the Reserve Bank of Australia’s (RBA) potential monetary policy direction.
The inflation report has heightened expectations that the RBA might opt to maintain current interest rates at its upcoming policy meeting next week. However, economists caution that additional rate hikes could threaten Australia’s economic recovery.
In related economic indicators, the National Bureau of Statistics (NBS) reported a Manufacturing PMI of 49.4 for July, slightly surpassing the expected 49.3 but falling short of the previous 49.5. The Non-Manufacturing PMI matched expectations at 50.2. Given the significant impact of the Chinese economy on Australia, these figures are particularly pertinent.
The downside for the AUD/USD pair may be limited as the USD faces its own challenges ahead of the Federal Reserve’s (Fed) interest rate decision next Wednesday. While the Fed is anticipated to keep rates steady in July, speculation is mounting about a potential rate cut in September. This speculation, coupled with signs of cooling inflation and a softening labor market in the US, is fueling expectations of multiple Fed rate cuts this year, possibly totaling three.
Market Movers: Australian Dollar Declines Amid Risk Aversion
The Australian Bureau of Statistics (ABS) reported a 3.8% increase in the Monthly CPI for the year ending in June, down from May’s 4%. The quarterly CPI rose 1% QoQ and 3.8% YoY in Q2. The RBA Trimmed Mean CPI, the central bank’s preferred measure, increased by 3.9% YoY in Q2, slightly below the expected 4.0%.
Building Permits in Australia fell by 6.5% in June, exceeding the anticipated 3.0% decline. This followed a 5.7% rise in May. Year-over-year, Building Permits dropped by 3.7%, an improvement from the previous year’s 8.5% decline.
National Australia Bank (NAB) forecasts that the RBA’s cash rate will hold steady at 4.35% until May 2025, according to a recent outlook. NAB predicts a reduction to 3.6% by December 2025, with further cuts expected in 2026.
In a Monday release, the Australian Prudential Regulation Authority (APRA) noted a gradual increase in arrears rates. APRA announced that macroprudential policy settings will remain unchanged following their latest economic assessment.
Bank of America suggests that robust economic growth in the US allows the Federal Open Market Committee (FOMC) to delay any adjustments. The BofA anticipates the Fed will start cutting rates in December, citing the strength of the US economy.
Technical Analysis: Australian Dollar Tests 0.6500 Level
The Australian Dollar is trading around 0.6500 against the USD. Technical analysis indicates that the AUD/USD pair has broken below a descending channel. The 14-day Relative Strength Index (RSI) is near the oversold 30 level, suggesting a potential upward correction.
Immediate support for the AUD/USD is at the 0.6470 level. On the upside, key resistance is at the former support level of 0.6575, aligned with the nine-day Exponential Moving Average (EMA) at 0.6581. A break above this level could lead the pair to test the psychological 0.6600 mark, with potential to reach a six-month high of 0.6798.
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