FX.co ★ AUD/USD: Australian dollar came off its peak

The AUD/USD currency pair took a nosedive last week, halting at the level of 0.6340. The Aussie lost almost all the gained positions. It's worth recalling that a prolonged and non-retractable rise preceded the extended decline—from the 0.6320 mark to the local (two-month) high of 0.6520. In other words, traders made an upward dash, only to turn around and return to their initial positions. The weekly chart of AUD/USD vividly illustrates the ascent and descent of the Australian dollar.

At the start of the new trading week, buyers of the pair once again became active, orchestrating a small correction. Today, the Aussie is trading based on Friday's momentum.

On the last day of the previous week, the Reserve Bank of Australia (RBA) released a report on monetary policy, which sounded rather hawkish. The key message of the document is concern about high inflation. According to RBA members, inflation in the country has already passed its peak value, but, firstly, it remains persistently high, and secondly, more stable than expected a few months ago.

Here, a slight digression is necessary to briefly recall that the Australian dollar began to actively depreciate after the November meeting of the RBA, despite the fact that the central bank raised the interest rate by 25 basis points. The reason is that the central bank removed from the accompanying statement the familiar phrase that "the regulator may need further tightening of monetary policy." Instead of this phrase, the RBA included another one: "whether further tightening of monetary policy will be needed to return inflation to the target level will depend on incoming data and changing risk assessments."

The market perceived such a rephrasing as a signal of a dovish nature, although de facto, the central bank left the door open for additional rate hikes.

That is why the RBA's report on monetary policy published on Friday was able to halt the downward movement of AUD/USD, as it reflected the "combat readiness" of the Australian regulator against the backdrop of inflationary trends in recent months. The document, in particular, states that there is still the potential for further inflation growth, and this potential is determined by both internal and external factors. It is noted that some indicators of inflation expectations are rising, and it is important for the regulator to stop this process. The RBA also stated that inflation turned out to be more stable than expected earlier, and the economy is slightly stronger.

It is worth recalling that at the end of October, key data on the growth of the Consumer Price Index in September and for the third quarter were published in Australia. All components of the release were in the "green zone," signaling a slowdown in the deceleration of inflation. For example, the Consumer Price Index in the third quarter rose to 1.2% (quarterly) after growing by 0.8% in the second quarter and with a forecasted growth of 1.1%. In annual terms, the CPI fell to 5.4%, with a forecasted decline to 5.3%. In monthly terms, the index also reflected alarming trends: the indicator rose to 5.6% in September, while most experts expected to see it at 5.3% (the indicator has been rising for the second month in a row).

Obviously, the decision on additional tightening of monetary policy will be made based on data on inflation growth for the fourth quarter. The relevant report will be published only in early next year, and the first meeting of 2024 will take place in February. Therefore, we can now talk about the prospects of a rate hike at the February meeting. At the December meeting, the RBA, apparently, will maintain a wait-and-see position, but at the same time, it will likely tighten its rhetoric if the CPI growth data in October surprise with positive figures.

In general, the central bank is preparing the ground for an additional increase in the interest rate in the near future. And this applies not only to the aforementioned report on monetary policy. Statements by representatives of the Reserve Bank have also noticeably toughened. For example, RBA Assistant Governor Economics Marion Kohler, stated that the decline in inflation is likely to be "more gradual than previously thought." At the same time, she allowed for another rate hike "if necessary."

Thus, the RBA's concern about high inflation allows the Australian dollar to stay afloat, including against the U.S. currency. However, the Aussie is not capable of playing its own game: sustainable growth of AUD/USD is still possible only in the case of a weakening greenback.

Inflation reports, which will be published in the U.S. on Tuesday and Wednesday (Consumer Price Index and Producer Price Index), will play a key role here. If they reflect a slowdown in inflation, hawkish expectations regarding the further actions of the Fed will weaken again, and AUD/USD buyers will be able to counterattack. In this case, the Aussie will not only return to the area of 0.64 but also test the resistance level of 0.6490 (the upper line of the Bollinger Bands indicator on the daily chart). However, if the reports reflect an acceleration of inflation in the U.S., AUD/USD sellers will again be in the lead—the pair may return to the annual lows, i.e., to the lower line of the Bollinger Bands on the same timeframe (0.6270).