Aussie steady after nasty slide
The Australian dollar has stabilized after a sharp downturn, losing over 300 points since Thursday. AUD/USD is trading below the 72 line and is close to a 2-month low.
All eyes are on Australia’s inflation report for the March quarter, with CPI expected to accelerate to 4.6% YoY, after a 3.5% gain in February. This would mark the highest rate of inflation since the GFC, as soaring food and fuel prices continue to drive inflation higher. If March CPI comes in as expected, the RBA may well respond with an oversize 0.40% increase at the policy meeting on May 3rd. This means that a strong inflation report should give the Australian dollar a boost.
The central bank, which last raised rates in 2010, would prefer to stay on the sidelines during the current election campaign or raise rates by a very modest 0.15%. The problem is that with inflation showing no signs of easing, policymakers may feel they can’t wait until June to hike rates.
The Federal Reserve, which has already embarked on its rate-hike cycle, has been sending out hawkish messages to the markets. Last week, Fed Chair Powell reiterated that a 0.50% rate increase was on the table, and according to CME’s Fed Watch, there is a 98% likelihood of a 0.50% hike at the May 4th meeting. With the Fed expected to tighten rates to 3% or higher by the end of the year, the rate-hike cycle should boost the US dollar in the coming months.
The Australian dollar, which was trading just shy of the 0.76 in early April, benefited from the surge in commodity prices. Now that commodities, especially iron ore, are falling in price, the Aussie is dropping along for the ride. Concerns over China’s growth are also weighing on the Australian dollar, as China is Australia’s number one trading partner.
- There is resistance at 0.7253 and 0.7390
- AUD/USD has broken through support at 0.7167. Below there is support at 0.7089
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