AUD/USD hits 3-month high amid RBA confidence, and weaker US dollar post-CPI

The AUD/USD has this afternoon surged to a three-month high at .6563, as the US dollar extended its post-CPI decline.

The US dollar index (DXY), faced its poorest performance since mid-July last week. The unexpected dip in the October CPI report led to US rates markets anticipating rate cuts. By July 2024, 50 basis points of Fed rate cuts are priced, with 100 basis points priced for the entirety of 2024.

In contrast, last week’s Australian labour force report was robust, and has raised expectations the RBA will need to hike rates early in 2024 to continue to cool the economy, and to bring inflation back to target within a reasonable time frame.

RBA vs. Fed outlooks: Australian robustness and US economic softness favour AUD/USD

An extended run of resilient Australian data, up against a run of softer US economic data, has shifted the respective outlooks of the RBA and the Fed (central bank divergence) in favour of the AUD/USD. Whether that run will be extended will depend on two key local events this week. The first is the release of the RBA meeting minutes from the October meeting, and a speech by RBA Governor Michele Bullock on Wednesday evening at the ABE Annual Dinner in Sydney.

What to expect from the RBA meeting minutes?

The minutes from the Reserve Bank meeting in November are scheduled to be released tomorrow, at 11.30 a.m. At its meeting in November, the RBA raised its official cash rate by 25bp to 4.35%. It was the RBA’s first rate rise since June, and was widely expected.

The catalyst for the rate hike was an upgrade in the RBA’s inflation forecasts to 3.5% from 3.3% by the end of 2024; and for inflation to be at the top end of the target range of 2-3% by the end of 2025.

“The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.”

While the RBA retained its tightening bias, it was watered down, providing a dovish element to the rate hike.

From

"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve."

To

"Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks."

The board’s meeting minutes are expected to reiterate the sentiments outlined above. They will be closely scrutinised around what options the board considered, the factors that would prompt the RBA to act on its tightening bias, and what factors might see the RBA move back to the sidelines.

RBA cash rate chart

AUD/USD technical analysis

After four prior rejections of the .6520/30 resistance area, we are encouraged by today’s price action. However, as we noted in previous reports to confirm a trend reversal, we need to see a sustained break above resistance at .6520/30.

Should the AUD/USD still be trading above the .6520/30 resistance level after tomorrow's RBA meeting minutes, we expect the currencies to extend its gains to the 200-day moving average at .6592.

Should it then see a sustained break above the 200-day moving average at .6592, we look for the AUD/USD to rally towards the next important layer of resistance at .6800/20.

AUD/USD daily chart

• _{Source Tradingview. The figures stated are as of 20 November 2023. 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.}