At the beginning of the new trading week, the dollar and its DXY index show uncertain dynamics, even declining during the Asian trading session. DXY futures remain within the tight range recently formed between 105.32 and 103.70. Last month, the dollar received a powerful bullish momentum after the Fed meeting ended on February 1, at which its leaders decided to raise interest rates once again and spoke in favor of further tightening of monetary policy.
At the same time, data from the U.S. labor market, also released in early February, indicated that "by many indicators, the labor market is still very strong." Federal Reserve Chairman Jerome Powell believes that "the labor market will play an important role in reducing inflation" and, consequently, in determining the parameters of the U.S. central bank's monetary policy.
In this regard, market participants will be waiting for the release this Friday of the next monthly report of the U.S. Department of Labor with data for February. According to the preliminary forecast, a sharp slowdown in the Nonfarm Payrolls indicator (-35,000 jobs) is expected, although unemployment will remain at the previous minimum levels of 3.5%. This is negative data for the dollar: it may fall.
Also this week (Tuesday and Wednesday at 15:00 GMT), Powell will speak at the U.S. Congress, and market participants will listen carefully to his speech in order to catch any signals from him regarding the prospects for the Fed's monetary policy, and therefore regarding the direction of the dollar's further movement.
However, the volatility in the dollar quotes may increase today on the release of the manufacturing orders in the U.S. at 15:00 (GMT). The data is estimated to fall by -1.8% in January after rising by +1.8% in December. The dollar may decline in the short term on these data.
During tomorrow's Asian trading session, we expect data on the foreign trade balance of Australia and China, as well as the publication of the Reserve Bank of Australia's interest rate decision at 03:30 (GMT).
During the February meeting, RBA leaders again decided to raise the interest rate by 0.25% in order to contain inflation, which reached 20-year highs (in the Q4 2022, the total annual consumer price inflation in Australia was 8.4% with the RBA's target level of 2%–3% per year).
At this meeting, the Reserve Bank of Australia may again raise the interest rate by 0.25% to 3.60%. Although, unexpected decisions are also possible, for example, a pause in increases or a stronger increase in the interest rate.
The first decision is supported by recent macro data from Australia, according to which the country's GDP grew by +0.5% in Q4. Although according to the forecast, growth of +0.8% was expected after growth of +0.7% in Q3 and +0.9% in Q2.
At the same time, the growth of consumer inflation slowed down a bit in January (to +7.4% from 8.4% in December).
GDP and CPI indicators are the main indicators of the state of the Australian economy, and along with data on the labor market, they are key for the country's central bank in determining the parameters of its monetary policy. In other words, tomorrow morning, we should expect a significant increase in volatility in AUD and AUD/USD quotes, respectively.
A softer RBA decision and less hawkish rhetoric about its interest rate outlook will cause the Australian dollar to weaken.
Conversely, the tough rhetoric of the accompanying statements of the RBA leadership will contribute to the strengthening of the AUD because it will confirm the seriousness of its intention to tame the growing inflation in the country and to reach the level of 2.05%–2.6% by the end of the year, as planned earlier.