Australian Dollar Talking Points
AUD/USD faces a batch of key event risks going into the end of July as Australia’s Consumer Price Index (CPI) is anticipated to hit a 13-year high, while the Federal Reserve appears to be on track to adjust the forward guidance for monetary policy.
Fundamental Forecast for Australian Dollar: Neutral
AUD/USD carves a series of higher highs and lows as it bounces back from a fresh monthly low (0.7289), and Australia’s CPI report may influence the exchange rate ahead of the Federal Open Market Committee (FOMC) interest rate decision as inflation is projected to increase to 3.8% in the second quarter of 2021, which would mark the highest reading since 2008.
Signs of stronger-than-expected inflation may generate a bullish reaction in the Australia Dollar as the Reserve Bank of Australia (RBA) insists that “CPI inflation is expected to rise temporarily to about 3½ per cent over the year to the June quarter,” and a sharp rise in consumer prices may put pressure on the central bank to change its tone over the remainder of the year as “the economic recovery in Australia is stronger than earlier expected and is forecast to continue.”
However, a below forecast CPI print may rattle the recent rebound in AUD/USD as it encourages the RBA to retain the current course for monetary policy, and the board may continue to endorse a wait-and-see approach at its next meeting on August 3 as Governor Philip Lowe defines ‘full employment,’ with the central bank head pledging to “provide the continuing monetary support that the economy needs as it transitions from the recovery phase to the expansion phase.”
Meanwhile, the FOMC may start to adjust its forward guidance as “various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings,” and fresh developments coming out of the central bank may trigger a bullish reaction in the US Dollar if the committee lays out a tentative exit strategy.
On the other hand, the Greenback may face headwinds as Chairman Jerome Powell tells US lawmakers that the FOMC will “provide notice well in advance of an announcement to reduce the pace of purchases,” and the central bank may merely attempt to buy time ahead it the quarterly meeting in September as “the Committee’s standard of ‘substantial further progress’ was generally seen as not having yet been met.”
With that said, AUD/USD is likely to face increased volatility going into the end of July, and it remains to be seen if the key event risks will sway the exchange rate amid the deviating paths between the RBA and FOMC.
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong