AUD/USD: Australian dollar's decline intensifies with risk aversion and global market shifts

Weekly AUD/USD performance review

Last week, the AUD/USD finished lower at 0.6548 (-2.06%), for its largest weekly fall in nine months.

This decline was the result of a perfect storm that included position unwind, technical selling, risk-aversion flows, softer commodity prices/concerns over China's slowdown, and stronger US gross domestic product (GDP) data. The AUD/USD's rapid descent, which included nine consecutive lower daily closes, is a reminder of why the Australian dollar is often referred to as "the Aussie battler."

Resilience of the Aussie battler and upcoming economic data

Despite the downturn, the AUD/USD is expected to recover, as is characteristic of "the battler." When looking for catalysts for a possible revival, the short-term interest rate differential remains a crucial factor in AUD/USD movements. In that sense, Wednesday's Australian Q2 Consumer price index (CPI) will be important, as will this week's Federal Open Market Committee (FOMC) meeting and Non-farm payrolls data in the US.

However, the recent surge in global equity market volatility has amplified its significance as a driver of the AUD/USD exchange rate. In the coming week, investors trading AUD/USD will need to closely monitor US tech stock earnings from Microsoft, Meta, and Apple, and pay particular attention to any further episodes of risk aversion.

AU Q2 CPI

Date: Wednesday, 31 July at 11.30am AEST

In the first quarter (Q1), headline inflation rose by 1% for an annual rate of 3.6% year-on-year (YoY), down from 4.1% prior but above the 3.4% expected. The Reserve Bank of Australia’s (RBA) preferred measure of inflation, trimmed mean inflation, rose by 1% quarter-on-quarter (QoQ). Which saw the annual measure of trimmed mean increase by 4.0% YoY, the softest rise in two years but still well outside the RBA's target of 2-3%.

Key inflation insights

Michelle Marquardt, Australian Bureau of Statistics (ABS) head of prices statistics, commented on the inflation trends. Stating, "Annually, the CPI rose 3.6 per cent to the March 2024 quarter. While prices continued to rise for most goods and services, annual CPI inflation was down from 4.1 per cent last quarter and has fallen from the peak of 7.8 per cent in December 2022."

The preliminary expectation for Q2 is for headline inflation to rise by 1% QoQ for an annual rate of 3.8%. The trimmed mean is expected to rise by 1% QoQ, which would see the annual rate of trimmed mean inflation remain at 4.0% YoY, above the RBA's own forecast of 3.8% for June.

The Australian interest rate market is pricing in 5 bp (20%) of a 25bp RBA rate hike at its meeting next week. If the trimmed mean prints at 1.2% or higher, it will greatly increase the chances of another RBA rate hike before year-end.

Trimmed mean annual inflation chart

Source: TradingView

AUD/USD technical analysis

The AUD/USD's recent break below support at 0.6700, coming from the April 0.6362 low, was the catalyst for the AUD/USD to test and break the support coming from the 200-day moving average at 0.6583, before it hit a low of 0.6513 last Thursday.

Earlier this week, the AUD/USD traded higher in an effort to work off oversold readings. As a result, there is potential for the AUD/USD to rebound towards resistance at 0.6585/0.6600.

However, withoutr clear signs of basing in place, expectations for significant upward movement beyond 0.6600 should be cautioned, pending further evaluation at week’s end.

AUD/USD daily chart