AUD to USD Forecast: Aussie Retail Sales to Influence the RBA Rate Path

Will retail sales figures raise investor expectations of an RBA rate hike after the 4% Monthly CPI Indicator?

Retail Sales Signal Resilient Aussie Economy and an RBA Rate Hike

On Wednesday, July 3, Australian retail sales will put the RBA and the AUD/USD in the spotlight.

Economists forecast retail sales to increase by 0.3% in June after a 0.1% rise in May. Hotter-than-expected numbers could raise investor bets on a 2024 RBA rate hike. Upward trends in retail sales reflect an improving consumer confidence and higher disposable income backdrop that may fuel demand-driven inflationary pressures.

Furthermore, a pickup in consumer spending could boost the Australian economy. Private consumption contributes over 50% to the Australian economy. In Q1 2024, private consumption rose by 0.4%, while the economy expanded by 0.1%.

Will the recent Monthly CPI Indicator and pickup in consumer spending force the RBA to raise interest rates?

Consumer Spending, Inflation, and the RBA Rate Path

In June, the RBA Board discussed raising interest rates to tackle inflation. Significantly, the Aussie Monthly CPI Indicator showed the annual inflation rate hit 4% in May, up from 3.6% in April. The numbers came out after the RBA interest rate decision.

An improving macroeconomic backdrop, a pickup in inflationary pressures, and upward trends in consumer spending suggest the need for a tighter policy environment. Inflation could become embedded in the Australian economy if the RBA does not tame inflation.

However, the RBA may also consider labor market conditions and service sector activity. The Australian services sector accounts for over 60% of the Australian economy and contributes to headline inflation.

Aussie Services Sees Weaker Labor Market Conditions and Softer Input Prices

In June, the Judo Bank Services PMI fell from 52.5 to 51.2, up from a preliminary 50.6.

The finalized survey revealed that the rate of input price inflation fell to a 33-month low. However, firms continued to raise selling prices. Employment rose at the slowest pace in almost one year.

Weaker labor market conditions, softer input prices, and slower service sector growth could signal a softer inflation outlook.

The RBA may need to consider the mixed signals at the August 5-6 RBA Monetary Policy Meeting.

However, considering the discussions at the June meeting, when the inflation rate was 3.6%, the inflation rate must pull back from 4% before the August meeting to give the RBA the time to digest more data points. A 4% inflation rate in July could cement an August RBA rate hike.

What do the experts say?

Westpac Chief Economist Luci Ellis expected the first RBA interest rate cut in November despite the recent inflation numbers.

In contrast, Bloomberg TV APAC Chief Markets Editor David Ingles said the hotter-than-expected inflation numbers led to a 50-50 probability of an RBA rate hike in September.

When considering the Australian macroeconomic environment, Sky News Business Editor Ros Greenwood discussed the Aussie economy, saying,

“You’d expect under normal circumstances the Reserve Bank would come to the rescue, start to cut interest rates, and get some economic growth going – well it can’t do that right now.”

In summary, with the hawkish RBA stance in June, an RBA rate hike may be inevitable if headline inflation does not soften before August.

Looking Ahead: Key Indicators to Watch

The Aussie dollar could show sensitivity to leading indicators for the labor market, private consumption, and inflation before the August RBA Policy Meeting.

Meanwhile, US economic indicators also need consideration.

Can US services sector PMI and labor market data fuel investor bets on a September Fed rate cut?

ADP Employment Change and Continuing Jobless Claims in the Spotlight

US labor market data remains pivotal to the Fed rate path. Fed Chair Powell discussed the labor market on Tuesday, saying that wage growth remained elevated.

Tighter labor market conditions could support wage growth and increase disposable income. Higher disposable income may fuel consumer spending and demand-driven inflation.

Economists expect the ADP to report a 156k increase in employment in June after a 152k rise in May.

Furthermore, economists expect continuing jobless claims to rise from 1,839k to 1,841k in the week ending June 22.

Better-than-expected numbers could reduce investor bets on a September Fed rate cut before the crucial US Jobs Report release (Fri)

However, investors should consider US services sector data later in the US session.

US ISM Services PMI Price and Employment Trends in Focus

Economists forecast the ISM Services PMI to fall from 53.8 in May to 52.5 in June.

Accounting for over 70% of the US economy, softer service sector growth could signal slower US economic growth. Beyond the headline figure, the prices and employment sub-components will draw investor attention.

The US services sector continues to fuel demand-driven inflation. A marked fall in the ISM Services Prices Index could support investor expectations of a September rate cut. Economists predict the ISM Services Prices Index to decline from 58.1 to 57.8 in June.

Additionally, economists expect service sector jobs to continue to fall.

Short-Term Forecast: Bearish

Near-term AUD/USD trends will hinge on the Aussie retail sales, US services sector numbers, and US labor market data. Hotter-than-expected Australian retail sales figures could raise bets on an RBA rate hike. Conversely, softer US labor market and services sector data may raise expectations of a Fed rate cut and tilt monetary policy divergence toward the Aussie dollar.

In conclusion, investors should consider reasons for the RBA not to hike rates in August. In contrast, investors remain hopeful of a September Fed rate cut. The US services PMI and labor market data could prove pivotal.

AUD/USD Price Action

Daily Chart

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

An AUD/USD break above the $0.67003 resistance level would support a move toward the $0.67500 handle.

Services PMIs and US labor market data need consideration.

Conversely, an AUD/USD drop below the 50-day EMA could bring the 200-day EMA and the $0.65760 support level into play.

With a 14-period Daily RSI reading of 55.49, the AUD could return to the $0.67500 handle before entering overbought territory.