After three successive winning sessions, the Australian dollar reversed directions on Wednesday. In the European session, AUD/USD was trading slightly above the symbolic 70 level.
Wage growth ticks higher
It wasn’t all that long ago that RBA Governor Lowe would reiterate that there would be no rate hikes until wage growth hit 3%. The rationale was that strong wage growth would indicate that higher inflation was not transient.
Well, the “T” word has gone out of fashion, after being unceremoniously retired by Fed Chair Powell. The RBA finds itself facing spiraling inflation, and raised rates for the first time in a decade, even though wage growth remained below 3%.
Lowe has been forced to adjust his stance and is now focusing on the fact that wage inflation is moving higher.
The wage price index release for Q1 ticked up to 2.4% YoY, up marginally from 2.3%. This is less than half of CPI, which stands at 5.1%.
Still, this won’t stand in the way of an RBA hike at the June meeting, as the central bank is determined to stamp out soaring inflation. The RBA will likely deliver a 0.25% hike, barring spectacular employment data on Thursday. If that occurs, the likelihood of a 40-bps hike would increase.
The Australian dollar’s impressive upswing paused after some hawkish rhetoric from Jerome Powell who said that interest rates could rise above the terminal rate of about 3.50% in order to contain inflation.
Former Fed Chair Bernanke said in an interview that the Fed erred in waiting too long in responding to inflation. Bernanke warned that he expected to see stagflation in the next year or two, with lower growth, high inflation and an increase in unemployment.
AUD/USD Technical
- There is resistance at 0.7064 and 0.7189
- There is support at 0.6946 and 0.6821