The Australian dollar, paired with the US currency, is showing a corrective growth this week after a sharp decline towards the 0.64 level. The northern pullback is uncertain: AUD/USD buyers are watching the greenback, which fluctuates back and forth, reacting to the changing information background. On the one hand, the White House agreed with the Republican leader in the House of Representatives on raising the US debt ceiling. On the other hand, doubts have arisen in the market that lawmakers from both parties will agree and vote for a compromise bill. Dissenting voices are already being heard from both Democrats and Republicans. The market sentiment is changing at a kaleidoscopic speed, reflecting on the positions of the American currency. For example, this morning, the US dollar index climbed upward and reached a two-month high. However, in the second half of the day, the greenback lost all its morning gains.
Awaiting the inflation release
Notably, most major currency pairs followed (and continue to follow) the US dollar this week, while the AUD/USD pair is slowly but steadily climbing up, reflecting the resilience of the Australian currency. The achievements of AUD/USD buyers are modest: the price has risen by less than 100 points in three days. Nevertheless, against the backdrop of the US dollar index's rise, such gains are significant. It indicates that the pair can rise due to the weakening of the US currency and the strengthening of the Aussie. In this context, the inflation report, published in Australia on Wednesday, holds particular significance. It refers to the April Consumer Price Index, the dynamics of which are closely monitored by the Reserve Bank of Australia (RBA) members and, consequently, by AUD/USD traders. If tomorrow's release falls within the "red zone," the Aussie will come under pressure across the market, including against the greenback.
The Australian regulator raised interest rates by 25 basis points in May after an April pause. However, the central bank members indicated that further prospects for tightening monetary policy still need to be determined. The published minutes of the May meeting confirmed the cautious stance of the RBA. The document stated that additional interest rate hikes may be required in the future, "but it will depend on how the economy and inflation develop."
The next meeting of the Reserve Bank of Australia will occur exactly one week later, on June 6. Therefore, tomorrow's release will undoubtedly determine the "hawkishness" of the RBA members. In monthly terms, the consumer price index has been actively declining for the third consecutive month: if the indicator was 8.4% in December, it reached 6.3% in March. According to the forecasts of most experts, the index will continue its downward trend in April, reaching 6.0%. Suppose the report meets the forecast (not to mention the "red zone"). In that case, the Aussie will come under additional pressure, as the RBA's likelihood of an interest rate hike at the June meeting will significantly decrease.
In addition to the inflation slowdown, another argument favoring a wait-and-see position is the deterioration of the labor market. Recall that, according to the latest published data, the unemployment rate in Australia rose to 3.7% (with a forecasted increase to 3.5%). The indicator of employment growth in April decreased by 4,000, while most experts predicted an increase of nearly 30,000 (this indicator entered the negative zone for the first time since January of this year). The crucial macroeconomic report turned out to be weak across all indicators, reflecting a decline in employment and an increase in unemployment. A weak inflation release will only add to the overall fundamental picture for the AUD/USD pair.
The greenback has its concerns
The US dollar is awaiting political battles in Congress. This week, lawmakers are expected to consider a compromise bill to raise the debt ceiling following the deal between the White House and the Republican leader in the House of Representatives. Dissatisfaction with this agreement exists on both sides, from Republicans and Democrats alike. Therefore, there is a certain risk that the bill may fail to pass both chambers of Congress. It is already known that some Republicans will vote against it. In particular, Representative Nancy Mace announced that "this game is not worth selling out our children and grandchildren."
Such an information background allows the safe-haven dollar to stay afloat despite the optimism of Joe Biden and Kevin McCarthy regarding the prospects of passing the controversial bill.
Conclusion:
The AUD/USD pair is on the verge of increased turbulence. If the inflation release, published on Wednesday, falls within the "green zone," the Aussie dollar may significantly strengthen its position. But decisions on long positions for the AUD/USD pair should be made only after the conclusion of the saga of raising the US debt ceiling.
The first target for the upward movement is the level of 0.6590 (the Tenkan-sen line on the D1 timeframe). The main target is 0.6650 (at this price point, the middle line of the Bollinger Bands coincides with the Kijun-sen line in the same timeframe). However, suppose the inflation report falls within the "red zone," and the political standoff in Washington drags on. In that case, the AUD/USD pair will likely return to the support level around 0.6490 (the lower line of the Bollinger Bands indicator on the daily chart).