- AUD/USD has run into resistance at 0.7100 amid skyrocketing Australian inflation.
- The RBA could find an interest rate spike of 3.60% by June in CY2023.
- Weaker US yields weigh on the US dollar as the Fed is expected to announce a smaller rate hike.
The AUD/USD pair has hit the round-level resistance of 0.7100 for the first time in the past five months amid new highs in Australian inflation of 7.8% year on year for the fourth quarter of CY2022. The annual CPI has been released stronger than expectations of 7.5% and the previous release of 7.3%. On a quarterly basis, inflation has risen to 1.9% versus the consensus of 1.6% and the previous version of 1.8%.
There is no denying that a higher-than-expected Australian inflation rate will force the Reserve Bank of Australia (RBA) to raise interest rates further at its monetary policy meeting in February. An Australian Financial Review poll of 34 economists shows that RBA Governor Philip Lowe will raise interest rates further to 3.60%. The RBA is expected to raise its Official Cash Rate (OCR) by 25 basis points (bps) in February and June. One of the outcomes of the study is also that the first post-pandemic rate cut will come into effect in March 2024.
Earlier this week, Australian treasurer Jim Chalmers said the worst part of the country’s inflationary crisis was over. He believes “the Australian economy will begin to soften somewhat this year and that is the inevitable likely consequence of higher interest rates and a slowing global economy.” New highs in inflation indicate that the interest rate peak has not yet been found and that the worst is not yet over.
Meanwhile, S&P500 futures have witnessed a marginal recovery after a sharp decline in early Asia. Despite the lack of signs of recovery in the US 500 equity basket futures, risk-perceived assets are still at risk and investors may want to avoid them further. The US Dollar Index (DXY) is struggling to stay above the immediate resistance of 101.50, weighed down by weaker returns. The growing likelihood of a smaller interest rate hike by the Federal Reserve (Fed) in its monetary policy in February is also affecting the US dollar.