AUD to USD Forecast: Did Services Input Price Trends Raise RBA Rate Hike Bets?

Economic Indicators: The Services Sector

On Wednesday, July 24, the Australian Services PMI impacted buyer demand for the AUD/USD.

The Judo Bank Services PMI fell from 51.2 in June to a six-month low of 50.8 in July.

According to the July survey,

• New orders declined in July, with new orders from abroad falling at the most marked pace in 2024.
• Job creation was the weakest since December 2022.
• An increase in the minimum wage pushed input prices higher.
• Input prices increased at the fastest pace since November 2023.

Services PMI Impact on the RBA Rate Path

The services sector accounts for over 70% of the Australian economy. It is also a major contributor to inflation.

Recently, the RBA raised concerns about high rents driving housing services and headline inflation. Labor market conditions were another focal point. Tight labor market conditions support wage growth that may fuel consumer spending and demand-driven inflation.

The July survey revealed a deterioration in labor market conditions. However, the influence of a minimum wage hike on inflation could draw the RBA’s interest.

In June, the RBA discussed raising interest rates. Upward trends in service sector prices, following the higher-than-expected Australian Monthly CPI Indicator, could raise expectations of an August RBA rate hike.

A more hawkish RBA rate path may support an AUD/USD move toward $0.70.

What Do the Experts Say?

Bloomberg TV APAC Chief Markets Editor David Ingles recently commented on the Monthly CPI Indicator. He said the inflation numbers led to a 50:50 chance of a September RBA rate hike.

On Wednesday, Judo Bank Chief Economic Advisor Warren Hogan reacted to the July Services PMI numbers, stating,

“The final price indexes, a good proxy for consumer price inflation, were both up in the month but not by much. The composite output price index is at 54.1, up just 0.1 points in July. At this level, the PMI price indicators tell us that inflation is most likely running at around a 4% annualized pace in the middle of 2024.”

In June, the RBA discussed rate hikes when the inflation rate was at 3.6%. The May Monthly CPI Indicator, out after the RBA interest rate decision, jumped from 3.6% to 4.0%. Higher inflation signals may force the RBA into raising interest rates.

US Economic Calendar

Later in the session on Wednesday, the S&P Global Services PMI may influence the Fed rate path.

Economists forecast the S&P Global Services PMI to fall from 55.3 in June to 54.4 in July.

Slower service sector activity may support investor bets on multiple 2024 Fed rate cuts as the services sector accounts for over 70% of the US economy. Weaker service sector activity could affect job creation and wage growth. Slower wage growth may reduce disposable income, curb spending, and dampen demand-driven inflation.

Investors should consider the employment and prices sub-components. A weaker job creation rate and declining input prices could further support investor expectations of Fed rate cuts.

In June, firms increased staffing levels, and input prices (including wage growth) remained elevated. Similar trends could reduce investor bets on multiple 2024 Fed rate cuts and boost US dollar demand.

Short-Term Forecast: Bullish

Near-term AUD/USD trends hinge on the US Services PMI and the US Personal Income and Outlays Report. Weaker US service sector activity and softer inflation numbers could raise expectations of September and December Fed rate cuts.

A more dovish Fed rate path may tilt monetary policy divergence toward the Aussie dollar and support a move toward $0.70.

Investors should remain vigilant, with US economic indicators likely to drive AUD/USD volatility. Monitor the real-time data, news updates, and expert commentary to adjust your trading strategies.

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AUD/USD Price Action

Daily Chart

The AUD/USD sat below the 50-day EMA while holding above the 200-day EMA. The EMAs sent bearish near-term but bullish longer-term price signals.

A return to $0.66500 would support a move toward the 50-day EMA and the top trend line. A break above the top trend line could give the bulls a run at the $0.67003 resistance level.

Services sector PMIs require consideration on Wednesday.

Conversely, an AUD/USD drop below the 200-day EMA could bring the $0.65760 support level into play.

With a 14-period Daily RSI reading of 36.16, the AUD could break below the $0.65760 support level before entering oversold territory.