The Australian dollar is stable today after a massive 1.40% drop on Monday. In the North American session, it trades at 0.7015, down 0.10% on the day.
Australian volatility continues
For those looking for volatility, the Australian Dollar should be for you. AUD/USD gained 150 pips last Wednesday to briefly break above the 0.7100 level for the first time since June 10th. The pair reversed sharply on Monday, falling 100 points. As Australia released wage growth on Wednesday and Thursday’s employment data, we could see further Aussie volatility. Year-on-year wage growth for the second quarter is expected to rise to 2.7% from 2.4% previously.
There were no surprises from the Reserve Bank of Australia minutes, with the RBA reiterating that its stance is data dependent and there is no preset path for rate hikes. The RBA has made three consecutive hikes of 50 basis points, bringing the policy rate to 1.85%. Markets are expecting another 50 basis point hike at the September meeting and have priced in a peak of 3.25% before year-end, which could mean rate hikes at the remaining four meetings in 2022. The RBA is in aggressive mode due to scorching inflation, which hit 6.1% in the second quarter, its highest level since 2001.
The job market remains strong, but the cost of living crisis and rising mortgage rates continue to weigh on Australian households. Will domestic demand, a key driver of the economy, hold up? The RBA minutes noted that “fiscal spending behavior continues to be an important source of uncertainty about the outlook.” Barring domestic demand weakening, the RBA will be able to hike rates further and RBA officials will closely monitor household spending and confidence indicators.
The Federal Reserve continues to send a hawkish message that the fight against inflation is far from over and rate hikes will continue. Markets are expecting the Fed to hike rates to a peak in a range of 3.50% to 3.75%, well above the current reference rate of 2.50%. Despite this consistent message from the Fed, financial markets don’t seem to be listening. The lower than expected July inflation report of 8.5% increased risk sentiment and sent the dollar lower. If inflation resumes its upward trend in August, risk appetite could evaporate and the US dollar regain its footing.
AUD/USD technical
- There is resistance at 0.7053 followed by monthly resistance at 0.7122
- AUD/USD has support at 0.6968 and 0.6902
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