AUD / USD Recovers 0.7400 Level, But Prepares for Strong Weekly Losses

• AUD / USD is on track to end the week sharply lower around the 0.7400 level, down around 1.6%.
• A dovish RBA on Tuesday was the main catalyst behind this week’s steep decline.

The AUD/USD is on track to end the week sharply lower around the 0.7400 level, shedding 1.6% or 120 pips from last Friday’s closing levels around 0.7520. That’s the worst week for the pair since August.

AUD / USD declined sharply on Tuesday, falling from above 0.7500 to below 0.7450 after the RBA announcement; RBA Governor Philip Lowe called prices an “overreaction” to the latest global inflation data, explaining that it was far from clear whether or not such inflationary pressures would be present in Australia. The bank admitted that it might need to raise rates in 2023, an aggressive reversal from its previous position of saying there will be no rate hikes until 2024, but that would still leave the RBA substantially behind other large G10 central banks in terms of normalization. of monetary policy, including the RBNZ, Norges Bank, BoC, Fed and BoE.

After consolidating on Wednesday, the Aussie took a turn for the worse again on Thursday after the BoE shook global rate and currency markets with a surprise decision not to raise interest rates by 15bps, triggering a larger global moderate appreciation that appeared to hurt the AUD in particular. That pushed AUD / USD down from 0.7450 to below the psychological level of 0.7400. Following a very strong report from the US labor market on Friday, it looked like things were going to get even worse for the Australian dollar, with AUD / USD falling towards 0.7460.

But a sharp decline in long-term returns from the US-led global developed market has blown the wind out of the sails of the US dollar and the dollar index, which briefly hit a year-on-year high above 94.60 immediately following the employment report, It has now reversed into negative territory on the day at 94.20, giving tailwinds to its major G10 counterparts, including the AUD. Hence, AUD / USD has been able to rally back to the 0.7400 level. Currency markets are now turning their attention to next week’s October consumer price inflation report from the US on Wednesday, followed by Australia’s October employment report during the Asian session on Thursday. Regarding the former, the annual CPI rate is seen to rise to a new multi-decade high of 5.8%, reflecting the recent strong increase in energy costs, as well as other increasing pressures on costs. It is likely to serve as a reminder that the Fed’s “transitory” argument is on shaky ground.