The AUD/USD currency pair marked a new annual low yesterday, reaching the level of 0.6273. The last time the pair was at the base of the 62nd figure was in October of the previous year. Recall that the sharp decline in AUD/USD back then was due to the slowing pace of the RBA's monetary policy tightening. In the October 2022 meeting, the Reserve Bank increased the rate by only 25 basis points, while most experts had predicted an increase of 50 basis points. The regulator never returned to the 50-basis point pace of tightening the OCR afterward.
But all of these events are a year old. At present, the situation has a somewhat different character. Yesterday's sharp drop in the price of AUD/USD was due to the strengthening of the greenback, which reacted to the release of data on the growth of the American economy in the fourth quarter. However, the dollar's triumph was short-lived: today, buyers of the pair regained the initiative and returned to the 63rd figure area, to the resistance level of 0.6350 (the middle line of the Bollinger Bands indicator on the daily chart).
The resilience of the Aussie can be explained by several fundamental factors: the main one being the increasing hawkish expectations regarding the RBA's future actions. Talks about the Reserve Bank resuming the rate hike cycle are becoming more frequent in the expert community. In particular, UOB Group's currency strategists have suggested that the regulator will raise the interest rate by 25 basis points at the November meeting. These conclusions were preceded by events that can be put into a chronological sequence.
For instance, a week and a half ago, the minutes of the RBA's October meeting were published, which surprised with its hawkish tone. In particular, central bank representatives acknowledged that inflation risks were of "serious concern." They stated that progress in reducing inflation, especially in the services sector, had significantly slowed down, while the Board had "a low tolerance for a slower return of inflation to the target level."
In other words, RBA members hinted that they would not tolerate a slower return of inflation to the target level and implied that another round of rate hikes may be needed in the near future. According to them, further tightening may be required "if inflation proves to be more sustained than expected."
The second hawkish signal came from RBA Governor Michele Bullock. On Monday, she reiterated one of the theses from the October minutes, stating that the central bank's Board would not accept inflation returning to the target level "more slowly than anticipated." According to her, the regulator is ready to raise the interest rate without hesitation if necessary. At the same time, Bullock made an important remark, stating that by the next meeting, scheduled for November 29, the Board would have "additional information that would allow them to make the appropriate decision." Obviously, she was referring to data on third-quarter inflation growth. And here, we move on to the next fundamental factor of a hawkish nature.
Yesterday, October 26, key data on CPI growth in September and for the third quarter were published in Australia. The release was contradictory: all its components were in the "green zone." On one hand, it reflected a decrease in inflation, but on the other hand, it signaled a slowdown in the rate of deceleration.
For instance, the Consumer Price Index in the third quarter increased to 1.2% (quarterly) after a growth of 0.8% in the second quarter and an expected increase of 1.1%. On an annual basis, the CPI decreased to 5.4%, with an expected decline to 5.3%. In monthly terms, the index clearly favored the Aussie, as the indicator rose to 5.6% in September, while most experts had expected it to be at 5.3%. The indicator has shown an upward trend for the second consecutive month.
Today, Bullock commented on this release. She acknowledged that inflation was "slightly higher than expected at the Central Bank." According to her, prices for goods are gradually decreasing, while inflation in the services sector remains stable and is "higher than the level that satisfies us." Additionally, Bullock reiterated the hawkish statement that the RBA has "always had low tolerance for inflation."
Can her words be perceived as an announcement of a rate hike? According to some experts, including UOB Group analysts, the likelihood of a rate hike next month has significantly increased. Many factors, including the rhetoric of RBA members (not just Bullock), which has recently noticeably hardened, indicate this. The inflation report has complemented the corresponding fundamental picture.
From a technical perspective, the AUD/USD pair today tested but did not surpass the resistance level of 0.6350 (the middle line of the Bollinger Bands indicator on the D1 timeframe). Considering long positions is advisable only after buyers of the pair overcome this price barrier and establish themselves above it. The targets of the upward movement are the levels of 0.6400 (Kijun-sen line) and 0.6450 (the lower boundary of the Kumo cloud, coinciding with the upper line of the Bollinger Bands indicator on the same timeframe).
