Market update: Australian dollar falls against USD as GDP slows

RBA warns of tightening possibility this year

The Australian dollar fell against the USD after the Australian economy slowed in the second quarter of the year, reinforcing the growing view that the Reserve Bank of Australia (RBA) is done with hiking interest rates.

The economy grew 2.1% on-year in the April-June quarter from 2.3% in the January-March quarter, compared with 1.8% expected, and 2.7% in the last quarter of 2022.

GDP grew 0.4% on-quarter, in line with expectations, after net export volumes expanded more than twice analysts’ expectations as the government spent big on infrastructure during the quarter, offsetting the softness in household consumption.

AUD/USD 5-minute chart

AUD/USD technical analysis

The data trajectory is likely to further strengthen the belief that the RBA will keep interest rates on hold for the rest of the year.

At its meeting on Tuesday, the RBA kept interest rates on hold, saying recent data were consistent with inflation returning to the 2-3% target range by 2025, boosting hopes that the tightening cycle was over.

However, the central bank reiterated that further tightening may still be required, though it would depend on the outlook for inflation and the labour market. Australia's consumer price index (CPI) eased more than expected in July, coinciding with the RBA’s view that the worst is probably over for inflation. Markets see a small probability of one last hike before the end of 2023.

Much would depend on the outlook with regard to the Chinese economy, as the RBA noted on Tuesday while keeping the cash rate steady at 4.1%. Chinese policymakers have responded with a spate of support/stimulus measures in recent months, but those measures have yet to have a meaningful impact on sentiment. China is Australia’s largest export destination.

AUD/USD daily chart

_{This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.}