AUD to USD Forecast: Impact of Aussie CPI on the RBA Rate Path

Will Australian Inflation Trigger an August RBA Rate Hike?

On Wednesday, June 26, the Australian Monthly CPI Indicator will impact buyer demand for the AUD/USD.

Economists forecast the Australian annual inflation rate to accelerate from 3.6% to 3.8% in May.

A pickup in inflationary pressures may force the RBA to seriously consider hiking interest rates during the August 5-6 monetary policy meeting. The threat of an RBA rate hike could become a reality when considering the recent RBA press conference. The RBA Rate Statement and Governor Michele Bullock alerted the markets to Board member discussions about raising interest rates.

Furthermore, the RBA amended language within the RBA Rate Statement, taking a more hawkish stance over concerns about inflation. The Rate statement stated,

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

The May RBA Rate Statement had a less hawkish tone, simply stating,

“The Board remains resolute in its determination to return inflation to target.”

While inflation figures from Australia could be pivotal for the RBA, investors should also monitor chatter from Beijing.

Will the EU agree to drop planned tariffs on electric vehicle imports from China?

Bad for Business and the Aussie Dollar: Another China Trade War

The EU and China will begin discussions about tariffs on electric vehicle imports from China this week. Averting a trade war with the EU and negotiating favorable bilateral trade terms could boost the Australian economy and the Aussie dollar.

China accounts for one-third of Australian exports. Australia has a trade-to-GDP ratio of over 50%. Furthermore, 20% of its workforce are in trade-related jobs. Improving trade relations between the EU and China could boost Chinese demand for Australian goods and services.

The Trump war on trade with China fueled investor uncertainty, impacting the Aussie dollar, Australian business investment, and consumer confidence.

However, progress on trade talks could be slow with the French Elections a focal point. Member states will have to vote on new trade terms. The French Election is an ongoing distraction for member states.

On Monday, Alicia Garcia Herrero of Bruegel offered a measured view of the likely direction of trade talks, saying,

“Nobody will dare to do this (remove the tariffs) now. Not before the elections in France. The Commission can’t change a decision it has been pondering for months on months on months. Yes, China is putting pressure on the member states, but they would need to vote with a qualified majority against the Commission.”

Investors should also consider the US economic calendar, as housing sector data could serve as a litmus test for the US economy.

The US Housing Sector, a Litmus Test of the US Economy

Later in the session on Wednesday, US housing sector data will garner investor interest.

Economists forecast US new home sales to increase by 2.9% in May after sliding by 4.7% in April. Investors should consider trends, with new home inventories causing volatility. Upward inventory trends could ease price pressures and lower prices for housing services, including rents.

Moreover, upward trends in demand for new homes could signal robust consumer confidence. Higher consumer confidence may fuel consumer spending and support expectations of a US soft landing.

On Monday, US Treasury Secretary Janet Yellen discussed Biden administration efforts to deliver new affordable housing, saying,

“We made a few additional announcements today. Things we can do to lower burden in one of our key housing programs of the Magnet Fund and also to help local housing agencies have access to reasonable low-cost financing through the Federal Financing Bank.”

Yellen also touched on homeowners and their unwillingness to buy new homes at current mortgage rates, another factor influencing supply-demand and housing services-related price trends.

While the housing sector data will draw interest, investors should track FOMC member speeches. The next crucial data release will be the US Personal Income and Outlays Report (Fri).

Short-Term Forecast

Near-term AUD/USD trends will depend on the Australian and US inflation numbers. Hotter-than-expected Aussie inflation numbers could tilt monetary policy divergence toward the US dollar. While the Fed is considering rate cuts, the RBA warned about inflation risks and rate hike discussions.

AUD/USD Price Action

Daily Chart

The AUD/USD sat well above the 50-day and 200-day EMAs, confirming the bullish price trends.

An Aussie dollar move through the $0.67003 resistance level could give the bulls a run at the $0.67500 handle. A return to $0.67500 could bring the $0.67967 resistance level into play.

Australian inflation, China-EU trade talks, and FOMC Member commentary require investor consideration.

Conversely, an AUD/USD fall through the $0.66500 handle could bring the 50-day EMA into play. A drop below the 50-day EMA may give the bears a run at the 200-day EMA and the $0.65760 support level.

With a 14-period Daily RSI reading of 51.92, the AUD could return to the $0.67500 handle before entering overbought territory.