The AUD/USD exchange rate continued its strong freefall this week as concerns about the Australian and Chinese economies continued. The Aussie has dropped for eight consecutive days, the longest streak since August last year. It has plunged by over 3% from its highest point in June.
Odds of RBA rate hike fall
The Australian dollar has been one of the best-performing currencies before the current plunge. It was up by almost 7% between its lowest and highest points this year as odds of a more hawkish Reserve Bank of Australia (RBA) rose.
The RBA has been one of the most hawkish central banks this year. In its last meeting, the officials even deliberated the merits of hiking interest rates because of the elevated inflation levels.
The members decided not to hike interest rates but, instead, warned that an increase may happen if inflation remains stubbornly high.
Recent economic numbers have shown that the country’s inflation has been in a downward trend but it remained above the 2% target. The headline Consumer Price Index (CPI) dropped from a peak of 7.8% to 3.6% in the first quarter.
Unlike other countries, Australia releases its inflation numbers quarterly, meaning that there is a lag. It also releases the monthly CPI indicator, which provides more information about inflation trends. The most recent data showed that the CPI rose to 4.0% in May, higher than the expected 3.8%.
Despite the steady inflation numbers, analysts now believe that the RBA will not hike interest rates this year. Instead, the bank will opt to leave rates higher for longer and start cutting either in December or in 2024. In a note, a Bloomberg analyst said:
“Our bet is that the RBA will opt to hold. For one, the next inflation readings should be a little cooler. What will tip the balance will be the RBA’s judgment on inflation expectations and forecasts for where inflation will be in 18-24 months — we think the central bank will likely stay in a high-for-longer holding pattern.”
Data released on Wednesday showed that the services PMI dropped from 51.2 in June to 50.8 in July. The manufacturing PMI rose slightly to 47.4, meaning that the sector is still contracting.
China economic numbers
The AUD/USD pair has also dropped because of the happenings in China, Australia’s biggest trading partner. Recent data showed that the country’s industrial production and retail sales dropped in July while the economy grew by 4.7% in the second quarter, missing the analysts estimates of 5.1%.
At the same time, Beijing did not announce any stimulus package at the Third Plenum, a gathering of leaders. This means that the country’s economy may not reach its 5% annual target of this year.
As a result, the prices of most Australian exports like iron ore and coal have dropped in the past few weeks. Other industrial metals have also retreated.
Federal Reserve and RBA decisions ahead
The next important AUD/USD news will come from the US, which will publish its Q2 GDP data on Thursday and July’s Personal Consumption Expenditure (PCE) data on Friday.
Economists expect the data to show that the economy expanded by 1.7% in Q2 after growing by 1.3% in Q1. Historically, the GDP data does not have a major impact on the US dollar.
The market believes that the PCE inflation data eased to 2.4% in July while the core PCE fell to 2.5%. If these estimates are correct, they will mean that inflation is falling, which the Federal Reserve will love.
Most analysts expect that the Federal Reserve will leave interest rates unchanged between 5.25% and 5.50% on Wednesday next week. The bank will also point to one rate cut this year as officials waits for the next economic numbers.
The top data to watch will be the July jobs and inflation report. If the data reveals that the unemployment rate rose again in July, it will increase the odds of a September interest rate cut. The Fed has noted that it was now more concerned about the labor market than inflation.
The Reserve Bank of Australia will deliver its interest rate decision on August 6th.
AUD/USD technical analysis
AUD/USD chart by TradingView
The daily chart shows that the Australian dollar is falling apart as it fell for eight days straight. It has even fallen below the 200-day Exponential Moving Average (EMA) and is nearing the key support at 0.6576, its lowest point on June 10th. Moving below the 200 EMA is seen as a highly bearish sign in the market.
The Money Flow Index (MFI) has moved below the neutral point at 50 and is about to hit its oversold level. Also, the Awesome Oscillator has crossed the zero line while the momentum indicator has tilted downwards.
Therefore, the AUD/USD pair will likely continue falling as sellers target the key support at 0.6500. However, a brief comeback is also possible as investors buy the dip.
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