The slowdown of the RBA rate hike contributed to the AUDUSD decline. However, the acceleration of Australian inflation indicates that the central bank hastened to slow down. RBA will have to increase it. How will this affect the pair? Let’s discuss the topic and make up a trading plan.
Weekly Australian dollar fundamental analysis
The flight of traders from the US dollar indicates that it is time for corrections in Forex. AUDUSD is no exception. Moreover, inflation in Australia continues to accelerate. Chinese GDP grew by 3.9% in the third quarter, faster than expected, while the RBA’s October plans to slow down monetary tightening are being questioned.
From July to September, consumer prices in Australia rose by 7.3%, the highest level since 1990. At that time, the RBA tightened monetary policy so aggressively that it provoked a recession. Given past experience, Philip Lowe and his colleagues act more carefully now. In October, they raised the cash rate less than investors expected from them, which had a negative impact on the Aussie. However, everything changed after inflation accelerated in the third quarter.
Dynamics of inflation in Australia, the US and the UK
Source: Bloomberg.
In fact, the RBA will not support the Aussie by aggressively raising rates. According to Assistant Governor Christopher Kent, the AUD has declined only 2% since the start of the year on a trade-weighted basis. The Chinese yuan has a significant share in the basket of currencies, although its rate has been unstable lately.
Thus, the RBA is not afraid of the AUSDUSD fall by more than 10% since the beginning of the year. However, the regulator cannot but react to the acceleration of inflation. According to its forecasts, consumer prices will reach a high of 8% in December, but judging by their current dynamics, the ceiling is higher. This forces the RBA to change strategy and pick up speed after the slowdown announced in early October. Bloomberg economists expect a maximum cash rate of 3.5%, while forward market forecasts are even higher at 4.2% by July.
Since May, the Australian regulator has raised rates by 250 bps to 2.6%. Now derivatives are forecasting another 50 bps increase at the next meeting scheduled for November 1st.
Thus, the markets believe that instead of slowing down the monetary tightening, the RBA will be forced to speed it up. This circumstance, together with an improvement in global risk appetite and sales of the US dollar against the entire range of assets, allowed the AUDUSD bulls to push the rate up to a 3-week high.
Weekly AUDUSD trading plan
Obviously, USD long trades have been overextended, and exiting them leads to a correction. I don’t think the Fed will like a weakening US dollar, declining Treasury yields and a rally in stock indices. After all, in this case, financial conditions are improving, and it will become more difficult to fight inflation. The hawkish Fed will contribute to the AUDUSD decline and allow us to switch from short-term purchases to medium-term sales when the price rebounds from resistances at 0.655 and 0.664.
Price chart of AUDUSD in real time mode
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