Last Friday, the dollar pairs were under pressure from the US dollar, which strengthened its positions all over the market. The budget initiatives of the White House, hawkish hints from some representatives of the Fed and the record growth of the base RFE allowed the US currency to increase. In turn, the Australian dollar also came under significant pressure: the AUD/USD pair updated a three-week low, namely the level of 0.7680.
But despite the downward impulse, the AUD/USD bears failed to leave the range of 0.7700-0.7800. By the end of the US session last Friday, the dollar index lost its hope. This fact affected all major dollar pairs to some extent, and the AUD/USD pair was no exception. The US currency became a victim of the trade principle "buy on rumors, sell on facts". As soon as Biden presented the country's record-breaking budget for the 2022 fiscal year during the middle of the US session on Friday, the US dollar began to actively lose its position. For example, buyers of the EUR/USD pair were able to return all the lost positions. Similar dynamics were observed in other dollar pairs. The AUD/USD pair also reversed, returning to the area of the 0.77 mark.
The fact is that Biden's "Big Budget" has already faced criticism from many American politicians. In their opinion, the adoption of the budget will lead to a significant increase in public debt, which may amount to about 112% of GDP. To finance his plans, the US President wants to increase the tax burden on companies and wealthy US citizens. However, the Republicans, as well as some representatives of the Democratic Party, strongly oppose this algorithm. Now, the US Congress, where Democrats have a small majority (especially in the Senate), must consider this draft of the country's budget. It can be recalled that the new fiscal year in the States begins on October 1, so the Congressmen and the White House still have plenty of time for political bidding.
Taking this into account, it can be assumed that this fundamental factor will fade into the background in the medium term, since the negotiation process will take more than one day and more than one week. Therefore, dollar pairs will switch to other fundamental factors this week.
This week's main event for the AUD/USD pair is the June meeting of the Reserve Bank of Australia, which will be held tomorrow. Majority of experts interviewed by Reuters believe that the June meeting will be ignored, since the issues of extending the bond purchase program and the need to change the switch to bonds maturing in November 2024 will be decided at the July meeting. Nevertheless, the RBA members can place certain emphasis tomorrow, assessing the growth dynamics of key economic indicators.
For example, the latest data on the growth of inflation was frankly disappointing. The overall consumer price index in the first quarter of this year came out at 0.6%, instead of the projected growth to 0.9%. The indicator has been declining for the second quarter in a row, reflecting a slowdown in inflation. In annual terms, the index was also in the "red zone", significantly falling short of the forecast value: the indicator came out at 1.1%, while experts expected it to be at 1.4%. Core inflation similarly disappointed traders: the indicator came out below the forecast levels both in monthly and annual terms.
If we talk about Australia's labor market, the situation here is no longer so unambiguous, but there are still loopholes. On the one hand, the unemployment rate declined to 5.5%. The indicator has been declining for six consecutive months and reached the lowest level since March 2020. But on the other hand, the unemployment rate is a fairly fragile and lagging indicator, while more recent data indicate a slowdown in the labor market. As an example, the growth in the number of employees in April fell by 30 thousand. This indicator went into the negative area for the first time since September last year, when Australia was covered by the next wave of the coronavirus pandemic. In addition, the dynamics of wage growth remains quite weak.
All the above-mentioned "shortcomings" of key releases will certainly be the subject of discussion on the part of the Reserve Bank members. In my opinion, the Central Bank will declare once again that it will not raise the rate until the actual inflation is settled on a stable basis in the target range of 2-3% (adding that the inflation indicators will be below the target values in the coming years). As for QE, the Central Bank may disappoint buyers of AUD/USD, stating the need for further stimulus. In this case, the Australian dollar will be under the strongest pressure, including in a pair with the US currency.
The technical side of the issue speaks of the priority of short positions, although the main trend indicators are muted, showing no clear downward signals. On the daily chart, the AUD/USD pair is in the Kumo cloud, but below the Tenkan-sen and Kijun-sen lines. Moreover, the price is located between the middle and lower lines of the Bollinger Bands indicator on the same time frame. In my opinion, the results of RBA's June meeting will not be in favor of the Australian dollar, so any upward surge can be used as an excuse to open short positions. The main downward target is the level of 0.7680 (lower line of the Bollinger Bands at D1).