The Australian dollar is steady today, after a massive 1.40% decline on Monday. In the North American session, AUD/USD is trading at 0.7015, down 0.10% on the day.
Aussie Volatility Continues
For those looking for volatility, the Australian dollar should fit the bill. AUD/USD jumped 150 points last Wednesday and briefly pushed above the 0.7100 level for the first time since June 10. The pair reversed sharply on Monday, falling 100 points. With Australia releasing wage growth on Wednesday and employment data on Thursday, we could see further volatility from the Aussie. Wage growth for Q2 YoY is expected to rise to 2.7%, up from 2.4% prior.
There were no surprises from the Reserve Bank of Australia minutes, with the RBA repeating that its stance would be data-dependent and that there was no pre-set path for rate increases. The RBA has delivered three consecutive hikes of 50 basis points, bringing the cash rate to 1.85%. The markets are expecting another 50bp hike at the September meeting and have priced in a rate peak of 3.25% before the end of the year, which could mean rate hikes at the remaining four meetings in 2022. The RBA is in an aggressive mode due to red-hot inflation, which hit 6.1% in Q2, its highest level since 2001.
The labour market remains strong, but the cost-of-living crisis and rising mortgage rates continue to hammer Australian households. Will domestic demand, a key driver of the economy, hold up? The RBA minutes noted that “the behaviour of household spending continued to present a key source of uncertainty for the outlook.” If domestic demand does not weaken, the RBA will be in a position to continue raising rates, and RBA officials will be closely monitoring household spending and confidence indicators.
The Federal Reserve continues to send out a hawkish message that the battle against inflation is far from over and the rate hikes will continue. The markets expect the Fed to raise rates to a peak in a range of 3.50% – 3.75%, well above the current benchmark rate of 2.50%. Despite this consistent message from the Feds, the financial markets don’t seem to be listening. The lower-than-expected July inflation report of 8.5% raised risk sentiment and sent the dollar tumbling. If inflation resumes its upward trend in August, risk appetite could evaporate and the U.S. dollar could bounce back.
AUD/USD Technical
- There is resistance at 0.7053, followed by a monthly resistance line at 0.7122
- AUD/USD has support at 0.6968 and 0.6902
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