Australian dollar steadies as trends get tested, where to for AUD/USD?

The Australian dollar has started this week consolidating with firming PMI data and RBA meeting minutes being released today. The Jibun Bank composite PMI came in at 49.2 for February against 48.2 prior and although it shows an improvement, it remains on the contractionary side of 50.

The RBA meeting minutes revealed most things that were already known by the market.

They said, “Based on a technical assumption that the cash rate rises to 3¾ per cent over time, headline inflation was expected to decline to 4¾ per cent by the end of 2023.”

The futures market is pricing in a cash rate peak of 4.20% later this year.

There are many sunny aspects to the outlook for the Australian economy, but a potential problem could lie in the fact that CPI is outstripping both PPI and wage-price inflation.

Year-on-year CPI to the end of 2023 was 7.8% and PPI for the same period was 5.8%. Tomorrow will see the Australian Bureau of Statistics (ABS) release the Wage Price Index. A Bloomberg survey of economists is forecasting an increase of 3.5% over the year to the end of December.

While the sharpest part of the monetary policy axe is in housing mortgages, businesses also face higher funding costs when policy is being tightened.

Looking at the aforementioned inflation gauges, it could suggest that businesses are currently able to pass on increasing input costs at a faster rate than they are experiencing. This might be a concern for the RBA when entrenched/embedded inflation expectations have been highlighted as an issue.

If consumers can bear the brunt of higher input costs and expanding profit margins for companies, it may suggest that consumer price pressures are still building. If the first quarter CPI comes in hot, again, the RBA might have to re-assess its outlook for rates and this may have consequences for AUD/USD.

AUD/USD technical analysis

The Australian dollar has steadied this week and it remains within an ascending trend channel.

AUD/USD had a look lower last Friday as it briefly dipped below a short-term ascending trend line It found support before a longer-term ascending trend line that forms the lower band of the ascending trend channel.

The 200-day simple moving average (SMA) currently lies near that trend line and may continue to provide support around 0.6800. The low seen last week at 0.6812 might also lend support.

A series of breakpoints and prior lows in the 0.6855 – 0.6877 area could also be a support zone. The rally this week has struggled to overcome the 260-day SMA currently at 0.6915. A clean break above the 260-day SMA or below the 200-day SMA, might see momentum evolve in that direction.

On the topside, resistance could be offered at the breakpoints and previous peaks of 0.6984, 0.6996, 0.7011 and 0.7030. The 21-day SMA is currently near 0.6984 and may offer resistance.

AUD/USD daily chart

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