AUD/USD Weekly Outlook: Australian Inflation Data to Drive RBA Rate Decision

The Australian Dollar finds itself at a crucial juncture as financial markets keenly await the release of pivotal Australian inflation data. Following a robust recovery from levels near 0.59, technical indicators suggest underlying strength. However, traders are bracing for potential volatility in the AUD/USD currency pair as these significant economic releases draw near.

AUD/USD Recovery Continues Amidst Improved Risk Appetite

Over the past week, the Australian Dollar exhibited broad-based strength against its major counterparts, marking its third consecutive week of gains versus the US Dollar. Notably, the AUD saw its most substantial advances against traditional safe-haven currencies, the Japanese Yen (AUD/JPY) and the Swiss Franc (AUD/CHF), a movement indicative of improving sentiment towards global risk assets.

This positive momentum followed signals suggesting a less confrontational stance on trade negotiations from a prominent political figure in the United States. This development helped to ease concerns that had previously exerted downward pressure on the risk-sensitive Australian Dollar.

Despite this overarching upward trend, the AUD/USD rally is displaying signs of consolidation as it approaches significant technical resistance levels around the 0.64 mark.  

Australian Trimmed Mean Inflation: The Central Catalyst for AUD/USD Movement

The upcoming Australian Trimmed Mean Inflation report stands out as the most critical data point for AUD/USD traders in the current week. Presently, RBA cash rate futures indicate a 62% probability of a rate cut occurring in May – odds that could see a considerable increase if the trimmed mean inflation rate decelerates to 3% year-over-year or lower.

The preceding Q1 reading for this core inflation measure registered at 3.2%, representing the slowest pace of price growth since Q4 2021. Similarly, the quarterly figure of 0.5% marked its lowest point since Q3 2021. 

Absent an unexpected upward surprise, these trends strongly suggest that the RBA is likely to implement a 25 basis point cut to the cash rate on May 20th, bringing it down to 3.85% from the current 4.1%.

Market pricing reflects a high degree of conviction in the RBA’s anticipated easing cycle, with futures contracts nearly fully pricing in another 25bp reduction by July. Projections for the year’s end suggest a cash rate of approximately 2.9%, representing a substantial 115bp decrease from the present level.  

US Economic Calendar to Influence AUD/USD Direction

Following the release of the Australian inflation data, market focus will pivot to a trio of high-impact economic releases from the United States. These figures carry the potential to significantly shape the trajectory of the AUD/USD pair:

• US GDP (Q1): The initial reading on first-quarter economic growth will offer insights into the resilience of the American economy.
• PCE Inflation: The Federal Reserve’s preferred gauge of inflation could lead to adjustments in expectations for US interest rate cuts.
• Nonfarm Payrolls: Employment data has been a key factor contributing to the Fed’s cautious approach regarding easing monetary policy.

The closely timed releases of the US GDP and inflation figures – occurring within a 90-minute window – create a scenario ripe for heightened AUD/USD volatility and the possibility of rapid price swings on Wednesday night.

Current Fed funds futures indicate a 58.6% probability of a 25bp rate cut by the Federal Reserve in June. This outlook remains susceptible to significant shifts depending on whether inflation data surprises to the upside or downside.

Market participants will also be closely monitoring any indications that recent trade tensions are beginning to impact US employment figures. Given that Nonfarm Payrolls data has consistently supported the Fed’s higher interest rate stance, even a modest disappointment could accelerate expectations for monetary easing, potentially providing a tailwind for the Australian Dollar against its US counterpart.

AUD/USD Market Positioning: Sentiment Shift Underway

The Commitment of Traders (COT) report reveals notable shifts in institutional positioning on the AUD/USD:

• Asset managers are nearing a net-long exposure for the first time since October, having reduced their short positions for four consecutive weeks.
• Large speculators have decreased their net-short exposure for four straight weeks, although they still maintain a substantial bearish position (-54.5k contracts).  

These positioning trends suggest a potential unwinding of negative sentiment towards the Australian Dollar, which could provide further upward momentum if upcoming economic data aligns with this shift.

AUD/USD Technical Analysis and Price Outlook

The technical landscape for the Australian Dollar showcases a remarkable recovery following its brief dip below 0.59 three weeks prior. The ensuing 9% rebound has propelled AUD/USD into proximity with the psychologically significant 0.64 level.  

Key technical factors influencing the AUD/USD include:

• The formation of a “V-bottom” recovery pattern suggests that the 0.5914 low may represent a significant price floor.  
• Last week’s doji candlestick pattern indicated a temporary pause or indecision among bullish traders.
• Resistance is situated at the 50% Fibonacci retracement level and the 200-day Exponential Moving Average (EMA).  
• Support provided by the 10-day EMA, offering a potential floor for short-term pullbacks.  
• A one-week implied volatility band spanning from 0.6283 to 0.6487.

The week may commence with limited directional movement in anticipation of Wednesday’s Australian CPI report, followed by the key US data releases. Short-term traders might focus on trading opportunities within last week’s price range.

For investors with a longer-term perspective, a pullback towards the 0.63 level could present a potential entry point for long positions, with targets set above 0.64 if the broader rally resumes. The underlying bullish technical structure is likely to remain intact unless price action breaks below the 0.6348 support level.

Bottom Line: Australian Inflation Data to Determine AUD/USD Direction

The near-term outlook for the AUD/USD currency pair hinges predominantly on the forthcoming Australian inflation figures, which will exert a significant influence on the probabilities of an RBA interest rate cut. With technical indicators displaying resilience and market positioning becoming less bearish, the Australian Dollar may possess further upside potential if inflation continues its moderating trend as anticipated.

Nevertheless, traders must remain vigilant regarding the trio of high-impact US economic releases, which could introduce significant volatility and potentially alter the currency pair’s trajectory. Effective risk management around these key events will be paramount for successful AUD/USD trading in the week ahead.

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