AUD to USD Forecast: Aussie Dollar Volatility on RBA, Housing Data Watch

Is the Australian economy doomed with another RBA interest rate hike to tame inflation?

Australian Home Loans and the Housing Sector in the Spotlight

On Monday, July 8, Aussie home loans and investment lending for homes could influence buyer demand for the AUD/USD.

Economists forecast a 2.0% rise in home loans and a 4.5% increase in investment lending for homes in May. In April, home loans increased by 4.3%, with investment lending for homes up 5.6%.

Rising home loans indicate higher housing demand, consumer spending, and tighter inventories.

Rising consumer spending could fuel demand-driven inflation. Moreover, tighter housing inventories could raise housing costs and rents, also fueling demand-driven inflation through housing services inflation.

Investors should also consider investment lending for home trends that can influence housing inventories and rents.

For context, economists expect Australian home loans to increase for the fourth consecutive month after declining by 4.6% and 5.6% in December 2023 and January 2024.

Can an RBA interest rate hike affect demand for home loans and investment loans for homes?

Higher Interest Rates and Housing Demand

An RBA interest rate hike would increase borrowing costs, reduce demand for new loans, and investment lending for homes. The downward trend in home loans could signal waning appetite for home purchases and increase inventories, leading to a drop in house prices.

Deteriorating housing market conditions could dampen housing services inflation and headline inflation.

Nevertheless, the increased borrowing costs could adversely impact the Australian economy. Consumers could respond to rising borrowing costs by curbing spending and increasing savings.

Can the Australian economy avoid an economic contraction in a higher interest rate environment?

Higher Interest Rates May Sink the Australian Economy

Notably, private consumption contributes over 50% to the Australian economy. In Q1 2024, the Australian economy expanded by 0.1%, with private consumption increasing by 0.4%.

Higher borrowing costs and savings could impact private consumption directly and deliver the first economic contraction since the COVID-19 pandemic.

For perspective, the Australian economy last contracted in Q3 2021 and had a technical recession in 2020, its first in almost 30 years.

Would the RBA risk an economic meltdown to tackle inflation?

Bloomberg TV APAC Chief Markets Editor David Ingles raised the chances of an RBA rate hike in reaction to hotter-than-expected inflation numbers, saying,

“After a third hotter-than-expected Australia inflation report (note this is the monthly report not the broader quarterly data set), cash rate futures and also swaps are currently attaching a near 50-50 probability of an RBA rate HIKE in September.”

Increased demand for credit could raise the odds further.

Meanwhile, US inflation will be the focal point for the Fed this week.

US Consumer Inflation Expectations and the Fed Rate Path

Later in the session on Monday, consumer inflation expectations will likely attract investor interest.

Economists expect US consumer inflation expectations to fall from 3.2% in May to 3.0% in June.

The consumer inflation expectations report is a leading indicator of the US CPI Report. Softer inflation expectations could ease consumer spending and dampen demand-driven inflation. A softer inflation outlook could allow consumers to delay purchases on the expectation of lower prices in the future.

Downward trends in consumer spending and softer inflationary pressures could allow the Fed to cut interest rates.

For perspective, consumer inflation expectations surged to 6.8% in June 2022 before falling to 3.0% in December 2023. After rising in April, a fall below 3% could increase investor hopes of a softer US CPI Report on Thursday, July 11.

Could the consumer inflation expectation numbers put the Fed on a more dovish footing? Fed Chair Powell will give testimony on Capitol Hill on Tuesday, July 9, and Wednesday, July 10. The Fed Chair may reference consumer inflation expectation trends in his given testimony.

Short-Term Forecast: Bullish

Near-term AUD/USD trends hinge on Australian consumer-related data, stats from China, and the US CPI Report. While speculation mounts about an RBA rate hike, a softer-than-expected US CPI Report may cement a September Fed rate cut.

Investors must remain vigilant when considering the importance of the US CPI Report on the Fed rate path. Stay ahead of market moves with real-time updates and expert insights on Australian economic trends and the AUD/USD. Keep up-to-date with our latest analysis and insights to navigate the forex markets.

AUD/USD Price Action

Daily Chart

The AUD/USD hovered comfortably above the 50-day and 200-day EMAs, affirming the bullish price signals.

An AUD/USD break above the $0.67500 handle could give the bulls a run at the $0.67967 resistance level.

Aussie home loan trends and US consumer inflation expectations require investor consideration.

Conversely, an AUD/USD drop below the $0.67003 support level could signal a fall toward the 50-day EMA.

With a 14-period Daily RSI reading of 64.25, the AUD could rise to the $0.67967 resistance level before entering overbought territory.