- The Australian dollar remains weak as markets await Australian inflation and retail sales data.
- China’s soft outlook raises concerns for Australia’s economy.
- RBA’s hawkish outlook could rescue the Australian dollar.
The Australian Dollar continues the week on a soft trajectory with AUD/USD falling 0.20% to 0.6535 ahead of retail sales and inflation data that will further guide market expectations on the Reserve Bank of Australia’s (RBA) next moves. Meanwhile, economic concerns related to the Chinese economy keep the Australian currency restrained.
With the Australian economy under pressure, persistently above-bound inflation continues to encourage the RBA to postpone rate cuts. According to forecasts, the RBA is expected to be among the laggards of G10 nations to introduce a rate cut, which should limit the Australian dollar’s downside.
Daily Market Wrap: Australian Dollar Expected to Continue Weakness Ahead of Inflation and Retail Sales Data
- The perpetual ‘risk-off’ sentiment persists with Australia’s economy heavily influenced by concerns over China’s economic slowdown. Focus will be on June and second quarter CPI data on Wednesday.
- Similar to the first quarter, Australia’s second quarter headline Consumer Price Index (CPI) is projected to rise 1.0% quarter-on-quarter while an acceleration to 3.8% year-on-year from 3.6% is anticipated. At the same time, June headline CPI is forecast to fall to 3.8% year-on-year.
- With the inflation rate substantially above the 2-3% target range, the RBA is projected not to alter policy hastily. In that regard, the swaps market is looking at the first 25 basis point cut next summer.
- The second quarter will also see the release of actual retail sales data on Tuesday. Retail sales volume in the second quarter is predicted to show a less severe decline of 0.2% quarter-on-quarter, comparatively lower than the 0.4% decline in the first quarter.
AUD/USD Technical Analysis: Sustained bearish outlook persists, fundamentals could help in the near term
The continuation of the AUD/USD below the 20-day, 100-day and 200-day simple moving average (SMA) raises concerns, hinting at a likely extension of the downtrend.
While the indicators signals are still deeply entrenched in the negative, the oversold situation could lead to a correction. However, the bullish momentum remains weak, hinting at a possible period of sideways trading unless there are fundamental catalysts. The aforementioned inflation and retail sales figures could open the door for an upward move.
Key support levels have been renewed at 0.6530 and 0.6500, while resistance levels remain at 0.6600 (200-day SMA), 0.6610 and 0.6630.
Central banks
Central banks have a key mandate which is to ensure price stability in a country or region. Economies constantly face inflation or deflation when prices of certain goods and services fluctuate. A constant rise in the prices of the same goods means inflation, a constant fall in the prices of the same goods means deflation. It is the job of the central bank to keep demand in line by adjusting its interest rate. For larger central banks, such as the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has an important tool to raise or lower inflation: changing its benchmark interest rate. At pre-announced times, the central bank will issue a statement with its benchmark interest rate and give additional reasons for why it is holding or changing it (cutting or raising it). Local banks will adjust their savings and lending rates accordingly, which in turn will make it harder or easier for citizens to earn profits on their savings or for companies to borrow and invest in their businesses. When the central bank substantially raises interest rates, it is called monetary tightening. When it lowers its benchmark rate, it is called monetary easing.
A central bank is usually politically independent. Members of the central bank’s policy council go through a series of panels and hearings before being appointed to a position on the policy council. Each member of that council usually has a particular conviction about how the central bank should control inflation and the resulting monetary policy. Members who want very loose monetary policy, with low rates and cheap loans, to substantially boost the economy, while being content with inflation just above 2%, are called “doves.” Members who prefer higher rates to reward saving and want to keep inflation under control at all times are called “hawks,” and they will not rest until inflation is at or just below 2%.
Typically, there is a chairman who chairs each meeting, has to build consensus between hawks or doves, and has the final say when votes must be split to avoid a 50-50 tie on whether current policy should be tightened. The chairman will make speeches, which can often be followed live, in which he or she will communicate the current monetary stance and outlook. A central bank will try to push its monetary policy forward without causing wild swings in rates, stocks, or its currency. All central bank members will channel their stance to the markets before a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, members are prohibited from speaking publicly. This is called a silent period.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
