HomeNewsAustralian Dollar Braces for Highest Inflation in Decades
Australian Dollar Braces for Highest Inflation in Decades

Australian Dollar Braces for Highest Inflation in Decades

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The Australian Dollar (AUD/USD) is treading water against the greenback at $0.69990 (-0.10%) as we start the new trading week. However, today’s calm is unlikely to last, with Wednesday’s CPI data expected to show consumer prices rising at the fastest rate in 32 years.

According to economists, the data will show consumer prices rose by 1.9% in the three months leading up to June. Should the print come in as expected, it will bring the annual inflation rate to 6.3% — the highest since 1990.

A higher-than-expected CPI release will undoubtedly increase the pressure on the Reserve bank of Australia, as it fights to contain a cost of living crisis affecting the Australian population. After keeping interest rates artificially low during the covid pandemic, the reserve bank began tightening at the fastest rate since 1994.

The RBA raised rates 25 basis points in May, followed by 50 bp hikes in June and July, bringing the cash rate to 1.35%. But despite the aggressive measures, the central bank shows no signs of wavering and has vowed to continue hiking until inflation is closer to 2% — with some economists expecting the cash rate to be as high as 3% by the end of 2022.

Australian Dollar Outlook

Turning to the daily AUD/USD chart, we see the Aussie has performed relatively well against its US counterpart over the last 10 days. After printing a new low for 2022 at $0.66812 earlier this month, the Aussie has clawed its way higher by 3%, to just under $0.69000 at the time of writing.

Technical traders will note the rally ran aground at the 50-Day Moving Average (DMA) at $0.69699, which is so far, limiting the recovery. Whether this continues to be the case, depends on just how hot Wednesday’s data is. If the CPI comes in at, or above expectations, we should expect the RBA to maintain its hawkish path, providing a tailwind for the national currency. In this event, clearance of the 50-DMA should provide enough impetus to propel the Aussie into the $0.71000-0.72000 trading range. By contrast, any signs that inflation is cooling could send the AUD/USD pair reeling back towards the 2022 lows, set earlier this month.

For now, its hard to predict exactly how this plays out. What we can say with some degree of confidence, is this week will be certainly be interesting.

AUD/USD Price Chart

Asutralian Dollar
Elliot Laybourne
Elliott is a former investment banker with a 20 year career in the city of London. During this time he held senior roles at ABN Amro, Societe Generale, Marex Financial and Natixis bank, specialising in commodity derivatives and options market-making. During this time, Elliott’s client list included Goldman Sachs, JP Morgan, Credit Suisse, Schroders Asset Management, and the Pennsylvania State Public School Employees Retirement System, amongst others. Today, he splits his time between Thailand and Dubai, from where he provides trading consultancy and business development services for family office and brokerage clientele.