AUD to USD Forecast: Inflation Expectations May Fuel RBA Rate Hike Bets

Can consumer inflation expectation numbers greenlight an August RBA interest hike?

Consumer Inflation Expectations and Aussie Household Woes

Australian consumer inflation expectation numbers could impact buyer demand for the AUD/USD.

Economists forecast consumer inflation expectations to increase from 4.1% to 4.3% in June. Hotter-than-expected numbers may cement investor bets on an August RBA rate hike.

On Wednesday, June 26, the Australian Monthly CPI Indicator signaled a 4% annual inflation rate for May, up from 3.6% in April.

Bloomberg TV APAC Chief Markets Editor David Ingles reacted to the Monthly CPI Indicator, 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.”

In the June RBA Press Conference, RBA Governor Michele Bullock stated that RBA Board members discussed hiking rates. The rate hike discussions occurred with the Monthly CPI Indicator at 3.6%.

Higher consumer inflation expectations could affect Australian consumer confidence and spending patterns. With private consumption contributing over 50% to the Australian economy, an RBA rate hike will hinge on the next round of inflation numbers.

As investors consider the implications of the Australian inflation numbers on the RBA rate path, China remains another focal point.

How will industrial profit numbers from China influence buyer appetite for the Aussie dollar?

China Industrial Profits and Aussie Trade Terms

While inflation remains the focal point, industrial profit numbers from China could move the dial.

Economists forecast Chinese industrial profits to increase 4.1% year-on-year (year-to-date) in May after rising 4.3% in April. Weaker-than-expected numbers could paint a gloomier picture of the Chinese manufacturing sector.

The Australian economy and the Aussie dollar remain sensitive to economic indicators from China. China accounts for one-third of Australian exports. Furthermore, Australia has a trade-to-GDP ratio above 50%, with 20% of its workforce in trade-related jobs. A deteriorating macroeconomic backdrop in China could affect demand, the Aussie economy, and the Aussie dollar.

Chinese industrial losses hit 22.9% in February 2023 before industrial firms returned to profit in February 2024.

While investors consider the stats from Australia and China, US economic indicators may influence the Fed rate path.

A Resilient US Labor Market and Fed Rate Cut Bets

Later in the session on Thursday, US jobless claims will draw investor attention. Economists forecast initial jobless claims to fall from 238k to 236k in the week ending June 22.

A larger-than-expected fall may reduce investor bets on a September Fed rate cut. Tighter labor market conditions could support wage growth and increase disposable income. Higher disposable income may fuel consumer spending and demand-driven inflation.

A higher-for-longer Fed rate path may raise borrowing costs and reduce disposable income, dampening demand-driven inflation.

Other stats include finalized GDP numbers and durable goods orders. However, unless there is a revision to the GDP numbers or a slide in durable goods orders, the stats will likely play second fiddle to the labor market data.

Short-Term Forecast

Near-term AUD/USD trends will hinge on the Australian and US inflation numbers. Softer-than-expected US inflation numbers could tilt monetary policy divergence toward the Aussie dollar. The Aussie Monthly CPI Indicator raised investor bets on an August RBA rate hike.

Conversely, investor hopes of a September Fed rate hike will likely depend on US inflation numbers out on Friday, June 28.

AUD/USD Price Action

Daily Chart

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

A breakout from $0.66500 could signal a move to the $0.67003 resistance level. An AUD/USD move through the $0.67003 resistance level may give the bulls a run at $0.67500.

Australian consumer inflation expectations and industrial profit numbers from China require investor consideration before the US session.

Conversely, an AUD/USD break below the 50-day EMA could signal a fall to the 200-day EMA and the $0.65760 support level.

With a 14-period Daily RSI reading of 52.51, the AUD could rise to the $0.67500 handle before entering overbought territory.