AUD/USD falls as US dollar soars to 105

• AUD/USD bears are moving in as the US dollar strengthens on risk aversion.
• DXY has risen above 105, dragging commodity currencies lower.

At 0.6875, the AUD/USD is down 0.4% on the day as the US dollar has recovered and broken above the 105 level, measured against a basket of currencies via the DXY index. The dollar index (DXY), which measures the USD against six currencies, rose 0.51% to 105.08. The two-decade high, 105.79, was reached on June 15. The quarterly readjustment of portfolios is also contributing to greater volatility in financial markets.

The greenback rose on Wednesday, while the euro gave up earlier gains, despite European Central Bank President Christine Lagarde saying the era of ultra-low inflation that preceded the pandemic is unlikely to return. The ECB is expected to raise interest rates in July for the first time in a decade, following global peers, to try to cool accelerating inflation, though economists are divided on the size of any hike.

Federal Reserve Chairman Jerome Powell said there was a risk that interest rate hikes would slow the economy too much, but persistent inflation was the biggest concern. Additionally, US stocks fell on Wednesday as traders worried about the impact of sharp rate hikes on the US economy. US data showed growth contracted in the first quarter amid a record trade deficit. This comes on top of a report on Tuesday that showed consumer confidence hit its lowest level in 16 months.

Eyes on the RBA

Meanwhile, the Australian dollar found some support on Wednesday as upbeat domestic data provided a temporary distraction from concerns about a global recession. Reuters reported that Australian retail sales surprised with a solid 0.9% rise in May, widely beating forecasts for a 0.4% rise. The news agency reported that sales were up a hefty 10.4% from May last year, though part of that was due to higher prices rather than volumes.

The data has buoyed demand for the Australian dollar on expectations that the Reserve Bank of Australia (RBA) is more confident that consumers can withstand higher interest rates as it braces for another likely hike in its rate. July policy meeting next week. RBA Governor Philip Lowe has previously suggested that drastic tightening would severely damage the economy. Rates are hovering around 3.25% by the end of the year and close to 4% in 2023, with investors betting on a further 50 basis point hike to 1.35% and a similar move in August.

Net short positions in the AUD fell for the third week in a row after RBA Governor Lowe’s hawkish comments and further optimism about the outlook for the Chinese economy could provide further support in the next data series. In this regard, we saw the Aussie bounce back when China halved the quarantine time for incoming travelers on Tuesday. Rising commodity prices have also had a positive impact on Australia’s terms of trade.

We expect AUD/USD to remain close to current levels one month ahead and to rise modestly to the 0.73 zone by the end of the year,” Rabobank analysts said.

Technical levels