AUD to USD Forecast: Aussie Inflation and Fed Moves to Drive Market Volatility

Aussie Inflation and the RBA Rate Path

On Wednesday, July 31, the Australian Monthly CPI Indicator will influence buyer appetite for the AUD/USD.

Economists forecast the Monthly CPI Indicator to fall from 4.0% in May to 3.8% in June.

A higher-than-expected inflation rate may raise investor bets on an August RBA rate hike. Higher interest rates would increase borrowing costs and reduce disposable income. Lower disposable income may dampen consumer spending and demand-driven inflation.

The RBA considered raising interest rates to tame inflation in June, with the Monthly CPI Indicator at 3.6%. Higher-than-expected inflation numbers could signal an AUD/USD return to $0.67.

Other stats include retail sales, housing sector credit, and quarterly inflation numbers. However, these stats will likely play second fiddle to the Monthly CPI Indicator.

What the Experts Say

Bloomberg TV APAC Chief Markets Editor David Ingles commented on May’s Monthly CPI Indicator. He said the inflation numbers led to a 50:50 chance of a September RBA rate hike.

Natixis Asia Pacific Economist Alicia Garcia Herrero stated,

“The RBA will be watching incoming inflation data like ever before. Major central banks seem to have defeated inflation, but RBA seems stuck. RBA should have done more earlier, as the Fed did, but Australia’s household debt was just too much of a constraint.”

China Economic Indicators: Private Sector PMIs

NBS private sector PMI numbers from China will also require consideration.

Economists forecast:

• Manufacturing PMI will fall from 49.5 in June to 49.3 in July.
• Non-Manufacturing PMI will decline from 50.5 in June to 50.2 in July.

The Manufacturing PMI typically has more influence on the AUD/USD. Lower-than-expected PMIs would signal a weakening demand environment, potentially impacting the Aussie dollar.

China accounts for one-third of Australian exports. Australia has a trade-to-GDP ratio of over 50%, with 20% of its workforce in trade-related jobs. Weaker demand may affect the Australian labor market and the economy.

Concerns About China’s Economy

Concerns about the Chinese economy have intensified since the Q2 2024 GDP numbers. The Chinese economy expanded by 4.7% in Q2 2024, following growth of 5.3% in Q1 2024.

Since the release of China’s GDP numbers, the AUD/USD has tumbled 3.42%, highlighting the influence of China’s stats on the pairing. A lack of meaningful fiscal stimulus from Beijing contributed to this reversal.

Expert Views on China’s Economy

Alicia Garcia Herrero recently shared her disappointment over the lack of policy measures from China’s Third Plenum, saying,

“There’s nothing new under the sun: the same industrial policies, the same ideas. No consumer-led growth, no mention of market forces, nothing.”

RBA staff consider China’s economy in their economic projections. A deteriorating macroeconomic environment could influence the RBA rate path.

US Economic Calendar: Fed Press Conference in Focus

Wednesday is pivotal for the US dollar, with the Fed in the spotlight.

Economists expect the Fed to stand pat, with the market focus on the FOMC press conference.

Fed Chair Powell’s views on inflation, the economic outlook, and the interest rate trajectory will be crucial. Victory in the Fed’s battle against inflation and support for September and December rate cuts could signal an AUD/USD return to $0.67.

What the Experts Say

Wall Street Journal Chief Economics Correspondent Nick Timiraos had this to say about the looming Fed interest rate decision,

“ The big question is where the committee and chair sets the bar for a September cut. The cleanest signal probably comes from Powell’s press conference because it’s much easier to convey nuance there, but…”

The CME FedWatch Tool gives a 100% chance of a September rate cut. An unexpectedly hawkish Fed, uncommitting to a September rate cut, could send the AUD/USD below $0.65.

Short-Term Forecast: Bullish

Near-term AUD/USD trends depend on the Aussie inflation numbers and the FOMC Press Conference. Higher-than-expected Aussie inflation could intensify RBA rate hike bets. Conversely, a dovish Fed, supporting multiple 2024 Fed rate cuts, could impact US dollar demand. A narrowing in interest rate differentials could support an AUD/USD move toward $0.70.

Investors should remain vigilant, with Aussie stats and the Fed likely to create AUD/USD volatility. Monitor the real-time data, news updates, and expert commentary to adjust your trading strategies.

Stay updated with our latest views and analysis to manage exposures to the forex markets.

AUD/USD Price Action

Daily Chart

The AUD/USD hovered below the 50-day and the 200-day EMAs, affirming the bearish price signals.

A breakout from the $0.65760 resistance level could give the bulls a run at the 200-day EMA. Furthermore, a break above the 200-day EMA would bring the 50-day EMA into play.

Aussie inflation numbers and the FOMC press conference require consideration on Wednesday.

Conversely, an AUD/USD drop below $0.65 could give the bears a run at the $0.64582 support level.

The AUD sits in oversold territory, with a 14-period Daily RSI reading of 29.16. Buying pressure could intensify at the Monday low of $0.65241.