The Australian dollar paired with the US dollar took a new price niche, finally consolidating above the key resistance level of 0.7000. This price target was trapped by the AUD for almost two months, making countless breakout attempts. However, the Australian-Chinese political conflict did not allow the pair to consolidate in the area of the 70th figure, let alone more significant achievements. Therefore, buyers were forced to trade in the range of 0.6850-0.6990 in anticipation of the upward impulse. These expectations justified themselves, however, the bullish impulse in the AUD/USD pair was caused not by the growth of the Australian dollar, but by a significant weakening of the dollar. The dollar index has been declining quite steadily for two weeks, with upward pullbacks. But in recent days, this decline has become an avalanche-like character: the index has updated multi-month lows, reaching the 93rd figure. The last time this figure was at such lows was last fall 2018. And although there is an upward correction of the index at the moment, in general, the US currency is under significant pressure.
It is noteworthy that the buyers of AUD/USD did not show themselves to the full yesterday, despite the dive of the US currency. The pair gained only 60 points to the middle of the 70th figure. During the Asian session on Tuesday, the Aussie drifted at all and spent several hours without any distinct price movement. In general, the pair has been trading within the 100-point range for almost a week (since July 22), in the range of 0.7080-0.7180. To reverse the situation, the bears need to return the price below the key target 0.7000, while the bulls need to settle in the 72nd figure. But so far, neither sellers nor buyers dare to make a price jump, so the pair is balancing between the deep corrective downward pullback and the continuation of the upward trend.
The hesitation of AUD/USD traders is due to the importance of tomorrow's release. The fact is that we will learn data on the growth of Australian inflation for the second quarter on Wednesday. As you know, it was during the second quarter that the world economy felt the consequences of the coronavirus crisis and the Australian economy is no exception. However, the Reserve Bank of Australia, despite the spring easing of monetary policy conditions, remains optimistic. In particular, following the results of the July meeting, the Central Bank reiterated once again the rhetoric that the "coronavirus strike" was not as severe as previously predicted. At the same time, the RBA admitted that the Australian economy still needs support from fiscal and monetary policy, as it is still going through a "very difficult period". In addition, the members of the regulator complained about Household spending stabilizing at a "new level" - Australians spent less on travel and entertainment (ie, services), but at the same time increased spending on household goods and food. In turn, retail trade in food products outside of supermarkets was up 33% year-on-year and in supermarkets by 21%.
Tomorrow's release will either help the RBA maintain an optimistic mood (if it turns out to be at least at the level of forecasts), or heighten concerns about further easing of monetary policy (most likely in the fall).
According to general forecasts, Australian inflation in the second quarter will show negative dynamics. On a quarterly basis, the consumer price index may fall into negative area (down to -2.0%) - for the first time since April 2016. In annual terms, a significant decline is also expected - to -0.4%. If the indicators come out at the level of forecasts, the release will have a short-term negative impact: the market is ready for such dynamics. But if inflation declines deeper, the pendulum could swing towards the bears of the AUD/USD pair.
It is worth recalling here that the latest data on the Australian labor market was a significant disappointment. The unemployment rate in June unexpectedly rose to 7.4% instead of the expected growth to 7.2% (from the previous value of 7.1%). The hidden unemployment rate was 11.7%, and the total number of unemployed reached almost one million people - this is the maximum in the entire history of the study, that is, since 1978. With regard to the growth rate of the number of employed, it jumped immediately to 210 thousand (with the forecast of growth by 106 thousand). And although at first glance, this is a strong result, the overall picture does not look so rosy upon closer examination of the indicator. The positive dynamics of employment growth in December was only due to the growth of part-time employment - this component jumped by 249 thousand, whereas full employment, on the contrary, showed negative dynamics.
If inflation data also disappoints investors, the Australian dollar will come under significant pressure. And at least the pair will decline to the lower border of the established price band, that is, to the level of 0.7080. In the wake of investors' concerns about the pace of the Australian economy recovery, the AUD/USD bears will try to go below the above target, pulling the price down to the middle of the 70th figure. Moreover, if the release turns out to be in the "green zone", then the positive reaction may be limited (growth to the level of 0.7180-0.7190 and possible testing of the 72nd figure).
Thus, it is necessary to make trading decisions on the AUD/USD pair after tomorrow's inflationary release, since the CPI dynamics will largely determine the fate of the Australian currency (at least in the medium-term), regardless of the behavior and "well-being" of the US currency.