AUD to USD Forecast: China Inflation, US Producer Prices, and Fed Rate Hikes

China: Inflation and Demand in the Spotlight

On Thursday, the Chinese economy will put the AUD/USD in the spotlight. Inflation figures will give investors a better sense of the current demand environment.

Economists forecast producer prices to decline by 2.8% year-on-year in March after falling 2.7% in February. Downward trends in producer prices signal a weakening demand environment. Producers reduce prices in periods of higher competition for new business, easing consumer price pressures.

Consumer price inflation forecasts suggest weaker consumer spending trends. Economists expect the annual inflation rate to fall from 0.7% to 0.4%. Economists predict a 0.5% month-on-month decline in consumer prices after the 1.0% rise in February.

The forecasts indicate a significant deterioration in the demand environment. However, it’s important to note that the Chinese Lunar New Year may have skewed the February data. Nonetheless, producer prices were down 2.5% year-on-year in January.

Weaker demand from China would impact the Australian economy and the Aussie dollar. China accounts for one-third of Australian exports. Australia has a trade-to-GDP ratio of over 50%, with 20% of the workforce in trade-related jobs.

Worsening trade terms could affect the Australian labor market, consumer confidence, and household spending. A downward trend in household spending would dampen demand-driven inflation and support a more dovish RBA rate path.

However, there are no economic indicators from Australia to influence buyer appetite for the AUD/USD.

US Economic Calendar: Producer Prices and the Fed

US inflation remains in the spotlight, with producer price figures for March in focus. After the hotter-than-expected US CPI Report, upward trends in producer prices would further impact investor bets on a Fed rate cut. Significantly, producer price trends may drive speculation about a Fed rate hike.

Economists forecast producer prices to increase 2.2% year-on-year after rising 1.6% in February. Additionally, economists expect core producer prices to rise 2.3% year-on-year after increasing 2.0% in February.

Other stats include the weekly jobless claims data. However, barring an unexpected spike in initial jobless claims, producer prices will likely have more impact.

With inflation under scrutiny, FOMC member commentary also needs monitoring. FOMC members John Williams, Susan Collins, and Raphael Bostic are on the calendar to speak. Reactions to the US inflation numbers and views on the timing of a Fed rate cut could move the dial.

Short-Term Forecast

Near-term AUD/USD trends will hinge on US producer prices and FOMC member chatter. Hotter-than-expected producer prices would further impact investor bets on a 2024 Fed rate cut. Hawkish FOMC member reactions to US inflation figures could further tilt monetary policy divergence toward the US dollar.

AUD/USD Price Action

Daily Chart

The AUD/USD sat below the 50-day and 200-day EMAs, sending the bearish price signals.

An Aussie dollar return to the $0.65500 handle would support a move to the 50-day EMA. A breakout from the 50-day EMA would give the bulls a run at the $0.65760 resistance level and the 200-day EMA. However, selling pressure could intensify at the $0.65760 resistance level. The 200-day EMA is confluent with the resistance level.

Inflation numbers from China and the US and FOMC member commentary need consideration.

Conversely, an AUD/USD fall through the $0.65 handle could signal a drop to the $0.64582 support level.

Given a 14-period Daily RSI reading of 44.00, the AUD/USD could drop below the $0.64582 support level before entering oversold territory.