AUD/USD firm as hot inflation brings RBA into play

Last week, the AUD/USD locked in a third consecutive week of gains to finish 0.57% higher at 0.6669, supported by a hotter-than-expected May inflation report. This ensured that the AUD/USD finished the first half of 2024 as the second-best performing currency pair behind GBP/USD.

RBA's hawkish stance and market sentiment

While last week's rise in inflation may not be significant enough to trigger a Reserve Bank of Australia (RBA) rate hike before year-end, it will likely ensure the RBA sounds extremely hawkish at its upcoming meeting in August and into year-end. This factor alone should ensure the AUD/USD remains well-supported, provided risk sentiment remains buoyant and volatility remains low.

Mixed signals from China

Unfortunately, the latest updates from the Chinese economy paint a much more convoluted outlook. Over the weekend, the official NBS Manufacturing Purchasing Managers' Index (PMI) remained in contractionary territory at 49.5 in June. However, the Caixin Manufacturing PMI released today increased to 51.8 in June, its highest since May 2021.

The divergence in China's Manufacturing PMIs supports the view that the Chinese economy is experiencing an uneven recovery, as hopes fade that Chinese authorities will announce more meaningful stimulus measures at the upcoming third plenum.

Key factors this week

For this week, the key local drivers of the AUD/USD will be Tuesday's RBA meeting minutes, retail sales for May on Wednesday, and updates on building approvals and the balance of trade.

RBA meeting minutes

Date: Tuesday, 2 July at 11.30am AEST

At its June board meeting, the RBA kept its official cash rate on hold at 4.35%, as widely expected. In the accompanying statement, the RBA noted that high rates are continuing to work to rebalance demand and supply and that the "persistence of services price inflation is a key uncertainty."

The board retained its neutral-sounding forward guidance stating, it's "not ruling anything in or out". However, the return of the comment that the RBA will do "what is necessary" to return inflation to target was viewed as a hawkish development.

RBA Governor Bullock's comments in the press conference that "a lot needs to go our way if we want to get inflation back to the target", and confirmation that the board discussed the option to hike rates but not the option to cut rates, added to the hawkish tone.

Following last week's hotter-than-expected May inflation data, the minutes will be closely scrutinised to see how close the RBA was to raising rates in June and for any clues as to whether May's hot inflation data will be enough to trigger a rate hike at the August meeting.

RBA cash rate chart

AUD/USD technical analysis

Expectations of a hawkish RBA and a possible rate hike before year-end, in contrast to expectations of a Fed rate cut in September, support the AUD/USD's continued outperformance in 2024.

Technically, to increase the chances that the AUD/USD based at the 19 April 0.6362 low, it must first maintain altitude above the 200-day moving average at 0.6555. It then must break above the mid-May 0.6714 high and multi-week trendline resistance at around 0.6710/20. In this case, the next upside target would become a cluster of horizontal resistance at 0.6870/00 before 0.7000c.

On the downside, if the AUD/USD were to see a sustained fall below the 200-day moving average at 0.6555, it would warn that a deeper pullback is underway towards support at about 0.6480. A pullback coming from the swing lows of March and April 2024, with scope to the February 0.6442 low.

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 1 July 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}