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The challenge for the RBA is that the country is going through a period of stagflation, where high inflation has been accompanied by slow economic growth.
- Sell the AUD/USD pair and set a take-profit at 0.6450.
- Add a stop-loss at 0.6520.
- Timeline: 1-2 days.
- Buy the AUD/USD pair and set a take-profit at 0.6550.
- Add a stop-loss at 0.6460.
The Aussie tilted upwards slightly as odds of another rate hike in Australia rose. The AUD/USD pair rose to a high of 0.6500 after the strong Australian inflation data and a relatively hawkish statement by the RBA governor.
Analysts are betting that the Reserve Bank of Australia will deliver another rate hike in its meeting next week after the strong inflation data. The numbers showed that the headline consumer inflation jumped to 6.8% in April from the previous 6.3%. This increase was mostly because of a jump in holiday travel and transportation costs.
Therefore, the bank may hike interest rates by 0.25% for the second straight month. In a note, a Goldman Sachs analyst said that the terminal rate will rise to 4.35% up from the previous estimate of 4.1%.
Meanwhile, Governor Philip Lowe said that the bank would struggle returning inflation to its 2% target because of the tight labor force. The unemployment rate in the country is hovering at 3.5%, the lowest level in decades. Wage growth, on the other hand, is expanding by 3.75%.
The challenge for the RBA is that the country is going through a period of stagflation, where high inflation has been accompanied by slow economic growth. Hiking interest rates in a period of slow growth normally leads to more weakness.
The AUD/USD pair also reacted to a statement by Philip Jefferson, a senior Fed official. In a statement, he said that he was comfortable with the bank pausing rates in its June meeting. He believes that a pause will give the bank an opportunity to assess the impact of the past rate hikes. His statement carries weight since he is the Vice Chair.
The key news to watch today will be a statement by Fed’s Patrick Harker, ADP private non-farm payrolls (NFP), and the ISM manufacturing PMI number.
The AUD/USD pair drifted upwards during the American and Asian sessions after it dropped to a low of 0.6457. The pair is stuck below the key support level at 0.6566, the lowest point on March 10. It has also moved below 0.6560 (May 30th high). The pair remains below the 25-period and 50-period moving averages.
Therefore, using trend-following principles, the path of the least resistance is lower, with the next key support level to watch being at 0.6450. The bearish view will become invalid if it manages to move above the resistance point at 0.6560.
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