AUD to USD Forecast: RBA Balancing Act: Inflation vs. Economic Growth

How close was the RBA to an interest rate hike in June? Did the latest Aussie inflation numbers meet the criteria for a rate hike?

June Meeting Minutes: Decoding the Next RBA Move

The RBA Meeting Minutes from the June 17-18 RBA Monetary Policy Meeting may influence buyer appetite for the AUD/USD.

Hawkish Shift: The Surprising RBA Stance in June

In June, the RBA Rate Statement and RBA Governor Michele Bullock surprised the markets with hawkish rhetoric.

The RBA Board tilted its Rate Statement to a more hawkish tone, adding the following text to the May statement,

‘And will do what is necessary to achieve that outcome.’

The May Rate Statement said,

‘The Board remains resolute in its determination to return inflation to target.’

Furthermore, RBA Governor Michele Bullock discussed the possible need for another rate hike to tackle sticky inflation. In contrast, the RBA Governor had poured cold water on speculation about further monetary policy tightening in the May press conference.

Inflation Surge: Is Australia Heading for Another Rate Hike?”

Importantly, since the RBA monetary policy decision, the Aussie Monthly CPI Indicator signaled an increase in inflationary pressures. The Australian inflation rate rose from 3.6% to an incredible 4.0%.

For perspective, the Monthly CPI Indicator fell from 5.6% in September 2023 to 3.4% in December 2023 and remained at 3.4% until an upward trend resumed in March 2024.

Investors should ask how determined the RBA is in its bid to return inflation to target.

If the RBA ignores a deteriorating labor market and the macroeconomic environment, an August rate hike is a distinct possibility.

Economic Tightrope: Labor Market Concerns vs. Inflation Control

The RBA Meeting Minutes could provide further clues on whether the Board would raise interest rates at any cost. Leading labor market indicators have signaled a deterioration in labor market conditions. Another rate hike may also send the Australian economy into recession for only the second time in almost 30 years.

Investors should consider tweaks to language within the Meeting Minutes, particularly regarding employment, household finances, and the economic outlook.

AUD/USD: How Rate Hike Speculation Could Drive the Pair

A willingness to hike rates at the expense of households, the labor market, and the economy could be a green light for a Q3 2024 hike. With the markets expecting a September Fed rate cut, rising bets of an RBA hike could send the AUD/USD pairing to the $0.67500 handle.

Recession Risk: The Potential Cost of Aggressive Rate Hikes

The Australian economy expanded by 0.1% in Q1 2024. Higher interest rates could spike borrowing costs, reduce disposable income, and cripple household spending. Private consumption contributes over 50% to the Australian economy. A slump in household spending could all but guarantee an Australian economic contraction. Australian household spending increased by 0.4% in Q1 2024.

Expert Voices: Diverse Opinions on Australia’s Economic Future

Bloomberg TV APAC Chief Markets Editor David Ingles reacted to the May Monthly CPI Indicator numbers, noting that hotter-than-expected inflation has led to a 50-50 probability of an RBA rate hike in September.

Last week, Sky News Business Editor Ros Greenwood highlighted the fragility of the Australian economy, which is barely above recession, suggesting that under normal circumstances, the RBA would cut rates to stimulate growth, but it currently cannot.

However, Westpac Chief Economist Luci Ellis forecasted the first RBA interest rate cut in November, emphasizing a slow and measured pace for subsequent rate cuts.

The expert views highlighted the uncertainty investors face vis-à-vis RBA policy moves and near-term trends for the Aussie dollar.

Looking Ahead: Key Indicators to Watch

This week, investors should consider retail sales (Wed) and trade terms (Thurs). However, we expect increased Aussie dollar sensitivity to leading indicators for the labor market, consumer spending, and inflation in the weeks ahead.

While there is plenty for investors to consider for the Aussie dollar, US economic indicators could influence the Fed rate path.

US JOLTs Job Openings: Will a Slide Signal a September Fed Rate Cut?

Later in the session on Tuesday, the US JOLTs Job Openings Report will attract investor attention.

Economists forecast job openings to fall from 8.059 million in April to 7.850 million in May.

A marked fall in job openings could suggest a deteriorating labor market environment. A weaker labor market environment could affect wage growth and disposable income. Downward trends in disposable income may impact consumer spending and dampen demand-driven inflation.

Meanwhile, economists predict job quits to decline from 3.507 million to 3.500 million. Workers are less likely to leave their jobs in an uncertain labor market environment, leading to falls in job quits.

For context, job openings trended lower for four consecutive months to April. In May 2023, job openings stood at 9.824 million.

Will investors respond to the JOLTs Job Openings Report or wait for the crucial US Jobs Report (Fri)?

Investors will likely be sensitive to the numbers, with the US Fourth of July holidays likely to see trading volumes slide on Thursday and Friday.

Beyond the numbers, Fed Chair Powell will also be in the spotlight. Reaction to the US Personal Income and Outlays Report could move the dial. However, Fed Chair Powell may avoid dropping any hints on monetary policy before the US Jobs Report.

Short-Term Forecast: Bearish

Near-term AUD/USD trends will hinge on the RBA Meeting Minutes, Aussie retail sales, and US labor market stats. Softer-than-expected retail sales figures could counter hawkish minutes and temper expectations of an RBA rate hike. Moreover, US labor market data could dictate investor sentiment toward the Fed rate path.

In conclusion, while the RBA remains focused on inflation, labor market and consumer spending numbers need consideration. For the Fed, inflation remains sticky, leaving the Jobs Report to guide investors on the inflation outlook.

AUD/USD Price Action

Daily Chart

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

An AUD/USD break out from $0.66500 could signal a move to the $0.67003 resistance level. Significantly, a break above the $0.67003 resistance level could give the bulls a run at the $0.67500 handle.

The RBA Meeting Minutes, US labor market data, and Fed Chair Powell require consideration.

Conversely, an AUD/USD break below the 50-day EMA could give the bears a run at the 200-day EMA and the $0.65760 support level.

With a 14-period Daily RSI reading of 55.67, the AUD may return to the $0.67500 handle before entering overbought territory.