AUD to USD Forecast: RBA Minutes Hint at Rate Hikes Amidst Inflationary Concerns

Monday Overview of the AUD/USD

The AUD/USD rose by 0.15% on Monday. Following a 0.06% gain on Friday, the Australian dollar ended the session at $0.65381. The Australian dollar fell to a low of $0.65234 before rising to a Monday high of $0.65519.

RBA Meeting Minutes Delivered Early Direction

On Tuesday, the RBA Meeting Minutes drew investor interest. The RBA left a rate hike on the table at the February 6 monetary policy decision. During the RBA press conference, RBA Governor Michele Bullock could not state whether rates would move higher or lower.

The RBA Meeting Minutes sent similar warnings, with inflation an ongoing concern.

Salient points from the RBA Meeting Minutes included,

• Despite progress, the Board needed more progress toward its objectives, and uncertainty about the outlook lingered.
• Inflation remained well above the target, with services price inflation reflecting excess demand.
• Board members agreed that demand remained high relative to the economy’s supply potential, fueling inflationary pressures.
• Members considered raising the cash rate by 25 basis points.
• However, Board members saw a reduced risk of inflation not returning to target within a reasonable timeframe. Board members viewed the timeline for inflation to return to target as acceptable.
• Uncertainty about the economic outlook was high, and the RBA remained concerned about the longer-term effects of sticky inflation.
• The Board, considering concerns about inflation, does not rule out further rate hikes.

With central banks the focal point this week, the PBoC will also be under the spotlight on Tuesday.

The PBoC, Loan Prime Rates, and the Chinese Economy

Economists expect the PBoC to cut the 1-year loan prime rate from 3.45% to 3.30% and the 5-year loan prime rate from 4.20% to 4.05%.

More policy support to bolster the Chinese economy could be a boon for the Australian economy. China accounts for one-third of Australian exports. Australia has a trade-to-GDP ratio of over 50%, with 20% of the labor market in trade-related jobs. PBoC policy support could fuel demand for Australian goods, the Australian economy, and the Aussie dollar.

US Economic Calendar: CB Leading Economic Index and the Fed

On Tuesday, the CB Leading Economic Index will be in focus. Economists expect the CB Leading Economic Index to fall by 0.3% in January. The Index declined by 0.1% in December.

In December, the Conference Board flagged weak consumer sentiment. A further deterioration in the macroeconomic environment could refuel bets on a May Fed rate cut.

Notably, six out of ten leading indicators contributed positively to the headline figure in December. Forecasts suggest leading indicators may signal a weakening economic environment.

Beyond the numbers, investors must also consider FOMC member commentary. Views on inflation and the timeline for Fed rate cuts could influence the buyer appetite for the AUD/USD.

Short-Term Forecast

Short-term AUD/USD trends will hinge on Australian inflation-leading indicators. In contrast to the Fed, the RBA remains willing to raise interest rates to tame inflation. However, the FOMC meeting minutes and Services PMI numbers could impact the timeline for a Fed rate cut.

AUD/USD Price Action

Daily Chart

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

An Aussie dollar break above the $0.65500 handle would bring the 50-day and 200-day EMAs into play. A breakout from the EMAs would give the bulls a run at the $0.66162 resistance level.

On Tuesday, the PBoC, US data, and Fed speakers need consideration.

However, a drop below the $0.64900 support level would support a fall toward the trend line.

A 14-period Daily RSI reading of 45.99 indicates an AUD/USD fall to the trend line before entering oversold territory.

4-Hourly Chart

The AUD/USD hovered above the 50-day EMA while remaining below the 200-day EMA, sending bullish near-term but bearish longer-term price signals.

An AUD/USD breakout from the $0.65500 handle would bring the 200-day EMA into play.

However, a fall through the 50-day EMA would give the bears a run at the $0.64900 support level. A break below the $0.64900 support level would support a fall toward the trend line.

The 14-period 4-Hourly RSI at 55.09 indicates an AUD/USD return to the $0.66162 resistance level before entering overbought territory.