AUD

Stickiness in services and domestic inflation, accompanied by continued resilience in labour market conditions, points to the likelihood of the RBA striking a more hawkish tone in its May monetary policy meeting, creating upside risks for the Australian dollar

The growth engine of the Chinese economy unexpectedly decelerated last month while Australian retail sales are growing at the weakest pace on record outside one-off economic shocks, putting AUD/USD under renewed pressure on Tuesday.

It’s not just AUD/USD and the RBA interest rate outlook that have been shaken up by Australia’s hot March quarter inflation report with the Australian dollar gaining sharply against the crosses, especially those currencies whose central banks are still expected to ease monetary policy this year.

AUD/USD is charging higher, powered by a hotter-than-expected Australian March quarter consumer price inflation report that has seriously dented the case for rate cuts from the Reserve Bank of Australia this year.

Whether you want to call it a bullish hammer, dragonfly doji, false break or morning star, the price action on the AUD/USD daily suggests the path of least resistance is higher in the near-term.

Contrary to what you may expect, movements in AUD/USD on Tuesday may be dictated by the performance of Chinese financial markets rather than the latest batch of Chinese economic data including Q1 GDP.

With ample good news priced into the US dollar outlook and a big reversal in the AUD/USD on Tuesday, there are signs the torrent of bearish sentiment may be slowly turning around.

AUD/USD remains a sell-on-rallies prospect in a week where interpretation of Fedspeak and US labour market data will dominate. It will be imperative for the US data to portray a message of continued economic strength to see meaningful downside materialise.

At the end of last week, I highlighted a potential bearish continuation pattern on AUD/USD. But the further this week has progressed, the more I have questioned its potential to break lower.

Australia’s inflation report undershot expectations in February, although there’s still evidence of stickiness in underlying price measures. Markets reacted by bidding Australian government bonds which have pressured AUD/USD, seeing it test uptrend support. A break could see the Aussie revisit its 2024 lows.

AUD/USD is threatening to break the uptrend it’s been in since October, failing to find traction despite what was the largest coordinated central bank dovish pivot since the start of the pandemic last week. With little event risk on the calendar, the fortunes of AUD/USD may be determined by USD/CNY following a dramatic end to trade in Chinese markets on Friday.