AUD/USD holds steady despite US dollar gains and RBA hawkish tone

The AUD/USD finished higher last week at .6641 (+0.38%), able to withstand a third week of US dollar strength supported by a hawkish Reserve Bank of Australia (RBA) Board meeting.

Hawkish stance from RBA

As widely expected, the RBA kept rates on hold at 4.35% at its Board meeting last week. In the accompanying statement, the RBA noted that while inflation is easing, it has been doing so more slowly than expected and remained above the midpoint of its 2-3% target range.

The RBA reiterated that returning inflation to target within a reasonable time frame remains its priority and added that it "will do what is necessary to achieve that outcome." In the 3.30pm AEST press conference, Bullock struck a hawkish tone as she concluded her opening remarks, noting that "a lot needs to go our way if we want to get inflation back to the target" and to stay on the narrow path. She confirmed that the board discussed the option to hike rates but not the option to cut rates.

Focus on monthly CPI ahead

This puts the spotlight squarely on this week's monthly consumer price index (CPI) indicator ahead of quarter 2 (Q2) inflation data on Wednesday, 31 July. The interest rate market is pricing in about a 10% chance of a 25 bp RBA rate hike in August to 4.60%.

AU monthly CPI indicator for May

Date: Wednesday, 26 June at 11.30am AEST

In April, the Monthly CPI indicator increased by 3.6% year-on-year (YoY), up from 3.5% in the previous month and above forecasts for 3.4%. The core measures also increased, with the trimmed mean rising to 4.1% YoY from 4.0%. The ex-volatile measures increased to 4.2% YoY from 4.1%, with a three-month annualised rate of 5%.

Key contributors to April’s rise and expectations for May

The most significant contributors to the rise in April were housing (+4.9%), food and non-alcoholic beverages (+3.8%), alcohol and tobacco (+6.5%), and transport (+4.2%). The report's details were more concerning, as the report, being the first month of the quarter, was skewed toward goods rather than the troublesome service components such as dining out, medical services, and transportation.

The expectation for May is for the monthly CPI indicator to rise to 3.8% in May, driven by base effects and with the update skewed towards the sticky services component this month. The two core measures are expected to remain steady at around 4% YoY for the month. Ahead of the release, the rates market is pricing in about a 15% chance of a 25 bp RBA rate hike in August to 4.60%.

AU monthly CPI indicator chart

AUD/USD technical analysis

Over the past seven weeks, the AUD/USD has been encapsulated within a range below downtrend resistance, currently around .6720 and above support at .6580/60. This is coming from the .7158 February high and the 200-day moving average.

To increase the chances that the AUD/USD based at the 19 April .6362 low, it needs to first maintain altitude above the 200-day moving average at .6550. It then must break above the mid-May .6714 high and multi-week trendline resistance noted above at about .6720. In this case, the next upside target would become a cluster of horizontal resistance at .6870/00 before .7000c.

On the downside, if the AUD/USD were to see a sustained fall below the 200-day moving average at .6550, it would warn that a deeper pullback is underway towards support at around .6480. This coming from the swing lows of March and April 2024, with scope to the February .6442 low.

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 24 June 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.}