AUD to USD Weekly Forecast: Will Aussie Inflation Expectations Force RBA’s Hand?

Weekly Overview of the AUD/USD in the Week Ending July 5, 2024

In the week ending July 5, the AUD/USD advanced by 1.19%, closing the week at $0.67473. The AUD/USD fell to a Tuesday low of $0.66340 before striking a Friday high of $0.67527.

Can the Aussie dollar break through resistance at $0.68 on monetary policy divergence shifts? Aussie consumer confidence and inflation expectations could be pivotal in another big week for the FX markets.

Australian Housing Sector and the RBA

On Monday, July 8, Aussie housing sector numbers will put the AUD/USD and the RBA in focus.

Economists forecast home loans to increase by 2.0% in May after rising by 4.3% in April. Additionally, economists expect investment lending for homes to advance by 4.5% in May after rising by 5.6% in April.

Increased demand for home loans could signal higher rents through tighter housing market conditions. Recently, RBA Governor Michele Bullock discussed the effects of rental trends on headline inflation. Higher rents may fuel demand-driven inflation and raise investor expectations of an August RBA rate cut.

However, consumer confidence figures may impact the AUD/USD more on Tuesday, July 9.

Aussie Consumer Confidence: A Leading Indicator of Consumer Spending

Economists predict the Westpac Consumer Confidence Index will fall by 0.3% to 83.4 in July.

A larger-than-expected fall in consumer confidence could suggest a decrease in household spending and softer inflationary pressures.

The Monthly CPI Indicator for May signaled more household woes, rising from 3.6% to 4.0%. Recent consumer confidence reports highlighted the effects of elevated inflation and RBA policy intentions on households.

A decline in consumer confidence could also affect the Australian economy, on the brink of a second recession in almost 30 years. Private consumption contributes over 50% to the Australian economy.

For context, the Australian economy expanded by 0.1% in Q1 2024, while household spending rose by 0.4%. A slump in household spending could be enough to deliver an economic contraction.

Would the RBA hike interest rates to tame inflation at any cost?

Consumer inflation expectation numbers could influence the RBA rate path more.

Will Consumer Inflation Expectations Keep Pressure on the RBA?

Consumer inflation expectations will attract investor attention on Thursday, July 11. The RBA may take notice of another increase.

Economists forecast consumer inflation expectations to increase from 4.4% to 4.5% in July.

For context, consumer inflation expectations remain below 5.2% in July 2023. However, another upward move toward 5% could force the RBA into action. In June, the RBA discussed hiking rates to tame inflation. The Monthly CPI Indicator and higher consumer inflation expectations could greenlight an August rate hike.

With inflation, the Australian economy, and the RBA under the spotlight, what have the experts said?

Economists and Mixed Views on RBA Interest Rate Expectations

In June, Bloomberg TV APAC Chief Markets Editor David Ingles had this to say about the hotter-than-expected Monthly CPI Indicator,

“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.”

However, economists remain divided, as households face more strain under the inflation environment.

Westpac Chief Economist Luci Ellis forecast a November RBA interest rate cut.

As investors grapple with mixed messages about an RBA rate hike, how will economic data from China impact the AUD/USD pairing?

China Stats: Inflation and Trade in the Spotlight

On Wednesday, July 10, crucial inflation numbers from China will draw investor attention.

Economists forecast the annual inflation rate to rise from 0.3% in May to 0.4% in June. Higher inflation could signal an improving demand environment. A pickup in demand could boost the Australian economy, which has a trade-to-GDP ratio of over 50%. Additionally, 20% of the Australian workforce is in trade-related jobs.

Improving trade terms with China could boost Australian exports and trade-related jobs.

For perspective, China accounts for one-third of Australian exports.

With trade a consideration for the Australian economy, trade data from China will also need consideration on Friday, July 12.

Economists expect imports and exports to increase 8.0% year-on-year in June after rising 7.6% in May. Furthermore, economists predict imports to advance 2.9% year-on-year after an increase of 1.8% in April.

Forecasts suggest an improving demand environment.

Is the Chinese economy as bad as the markets think?

Research service firm East Asia Econ released a paper on the Chinese economy on Saturday, July 6, stating,

“Despite the collapse of consumer confidence, consumption in China isn’t so weak. And despite the apparently soft labour market, wage growth isn’t bad either.”

Meanwhile, the US economic calendar remains crucial for near-term AUD/USD trends, with the US CPI Report a critical data release.

US CPI Report: Will Inflation Cool Enough to Cement a September Rate Cut?

The US CPI Report will be in focus on Thursday, July 11.

Economists forecast the US core inflation rate to remain at 3.4% in June. Furthermore, economists expect the annual inflation rate to ease from 3.3% to 3.1%.

Softer-than-expected inflation numbers could cement bets on a September Fed rate cut.

On Tuesday, July 2, Fed Chair Powell said inflation trends were promising but highlighted wage growth remained elevated. Wage growth slowed in June.

For context, core inflation has softened over the past 12 months, falling from 4.8% in June 2023 to 3.4% in May 2024.

Did the US Jobs Report send any red flags for the Fed to worry about?

Arch Capital Group Global Chief Economist Parker Ross reacted to the US Jobs Report, stating:

“It’s now looking increasingly likely that we’re approaching an inflection point for the labor market and the Fed should sit up and take notice.”

Other US stats include producer prices and Michigan Consumer Sentiment numbers. The numbers are out on Friday, with producer prices a likely focal point.

Economists forecast producer prices to rise 2.2% year-on-year in June after an increase of 2.2% in May.

Softer-than-expected numbers could also bolster the case for a September Fed rate cut. Producers reduce prices in a waning demand environment, dampening demand-driven inflation.

With the US CPI Report, the crucial data release, comments from the Fed also need consideration.

Could Fed Chair Powell change his tune on wages?

Fed Chair Powell Testimony and the Fed Rate Path

Fed Chair Powell is on the calendar to give testimony on Capitol Hill on Tuesday and Wednesday.

Views on inflation, the US labor market, the economic outlook, and the Fed rate path could move the dial.

Comfort in the June wage growth numbers and inflation trends could cement investor expectations of a September Fed rate cut.

Short-Term Forecast:

The near-term trend for the AUD/USD will hinge on the US CPI Report, Aussie consumer-related stats, economic data from China, and Fed Chair Powell.

However, softer-than-expected US inflation numbers could fuel buyer demand for the AUD/USD pair. While the RBA considers a rate hike, the CPI Report could cement a September Fed rate cut and sink the US dollar.

In conclusion, economic data from China and Aussie consumer-related numbers will influence bets on an RBA rate hike. US core inflation needs to soften to signal a September Fed rate cut. Fed Chair Powell could kickstart a bullish week for the AUD/USD if he supports a Fed rate cut.

Stay informed with our latest updates and insights to navigate the Forex markets effectively.

AUD/USD Price Action

Daily Chart

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

An Aussie dollar break above the $0.67500 handle could signal a move to the $0.67967 resistance level. Moreover, a breakout from the $0.67967 resistance level could give the bulls a run at the $0.68500 handle.

Economic data from China, consumer-related stats from Australia, the US CPI Report, and Fed Chair Powell require consideration.

Conversely, an AUD/USD break below the $0.67003 support level could signal a drop to the 50-day EMA. A fall through the 50-day EMA would bring the 200-day EMA and the $0.65760 support level into play.

With a 14-period Daily RSI reading of 66.76, the AUD/USD could rise to the $0.67967 resistance level before entering overbought territory.