Despite the most aggressive cash rate hike since 1994, the Aussie fell like a rock. Investors live in the future, and the RBA’s hints at a slowdown in the monetary tightening cycle were taken as a reason to sell the Australian dollar. Let’s discuss the topic and make up an AUDUSD trading plan.
Weekly Australian dollar fundamental analysis
The Australian dollar dropped following the rate hike by half a point not because this move had been priced in. The RBA stance echoes the Fed, which made its further decisions on rates dependent on the data. Investors interpreted this as a soon slowdown in the RBA monetary tightening cycle. The AUDUSD failed to break higher than the first target indicated in the previous article.
Ahead of the RBA August meeting, 28 out of 30 Bloomberg experts predicted an increase in the cash rate from 1.35% to 1.85%, which eventually happened. The RBA raised the rate by half a point for the third time in a row, which has not happened since 1990. Since May, borrowing costs have increased by 175 basis points, which suggests the current monetary tightening cycle is the most aggressive since 1994. Furthermore, historically low unemployment and more than 6% inflation prove that rates should be even higher. Money markets expected to see the rate at 3%, but Philip Lowe and his colleagues do not seem to continue rising rates that aggressively.
Dynamics of employment, unemployment and GDP in Australia
The Reserve Bank of Australia is willing to take further steps to normalize monetary policy, but it doesn’t follow the previously indicated plan. The size and timing of the change in the cash rate will be determined by the incoming data. The RBA is likely to follow the Fed. A week earlier, the latter also noted the need to act on a session-by-session basis.
The RBA officials sound less hawkish also because of a lower inflation rate than Bloomberg experts expected, as well as the slowest growth in retail sales in June since the beginning of the year. High prices affect consumer activity which is fraught with a serious contraction in GDP, even though the labor market is strong.
Dynamics of retail sales and unemployment in Australia
However, Goldman Sachs estimates the likelihood of a recession in Australia over the next 12 months at just 25%. The basic scenario is that the Australian economy will not face a downturn. In this case, the RBA could continue raising interest rates, supporting the AUDUSD rally.
However, the Aussie is under pressure. Following numerous speeches of the FOMC officials convincing that the Fed will not pause and the federal funds rate will continue rising in 2022 and 2023, the US stocks fell, and the risk appetite became lower.
Weekly AUDUSD trading plan
The AUDUSD trend will depend on the US jobs report. A strong labor market, including the wage growth rate of 5%, will lure investors back to the US dollar, sending the AUDUSD to 0.681 and 0.676. Otherwise, lower-than-expected growth in employment and wages will test the Fed’s determination and send the AUDUSD above 0.7.
Price chart of AUDUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.