Australian dollar weakness will continue as inflation drops

AUD underperformance is set to continue

• Australian monthly CPI drops to an 8-month low: Monthly inflation at 6.8% was lower than the consensus forecast.
• Even more likely for the RBA to end its rate hikes: The March hike to 3.60% looks like it will be the last.
• AUD is underperforming…again: The Australian dollar remains the worst-performing currency in major forex.
• Elsewhere, equities are positive: European indices continue to creep higher, helped by US futures being +0.6% overnight.
• Metals fall but oil rallies again: The reversal continues on commodities, with metals

Falling Australian inflation weighs on AUD

The Australian Monthly CPI dropped more than expected in February.

The reading fell to 6.8% from 7.4% in January. This was below the decline to 7.1% that the market had forecast.

This makes it even more likely that the Reserve Bank of Australia will pause its monetary policy tightening at the next meeting in April.

It is also weighing on the AUD this morning.

The last RBA hike has likely already been seen

At its last meeting on 7th March, the Reserve Bank of Australia (RBA) increased the interest rate to 3.6%, which is an 11-year high.

However, a day later RBA Governor Philip Lowe said this:

“…with monetary policy now in restrictive territory, we are closer to the point where it will be appropriate to pause interest rate increases to allow more time to assess the state of the economy.”

He also said that the appropriate moment to pause would:

“be determined by the data and our assessment of the outlook.”

Has that moment now arrived? The market increasingly believes that it is.

Also, this week, with inflation falling today, yesterday Australian retail sales increased by just +0.2% MoM.

Aside from a sharp decline in December, this was the weakest monthly increase for more than 12 months.

Even though the labour market remains tight (a consistent theme for major economies) the economic data is pointing towards a pause in monetary policy tightening.

Add in the concerns over the US (and European) banking crisis, the March hike to 3.60% by the RBA will likely be the last.

According to Reuters, interest rate futures are pricing just a 5% probability of a hike in April. Furthermore, a 25 basis points rate cut is being priced in from November.

The AUD is underperforming, it is likely to continue

Compared to other central banks, the pace of the rate hikes by the RBA has been tailing off in recent months.

The Bank of Canada has already hit the pause button and this is one of the reasons why the CAD is struggling relative to other major currencies.

The RBA on pause would play into an already underperforming AUD.

The performance of major currencies relative to the USD over the past month reflects all this.

The AUD is considered to be a higher-risk currency. During a time when there is a trend of risk aversion due to concerns in the banking sector, this does not bode well for the AUD.

AUD crosses reflect the pressure

The Australian dollar looks to be under selling pressure against major currencies.

GBP/AUD continues to trend higher

With GBP performance remaining strong in recent weeks, the GBP/AUD cross continues to pull decisively higher.

The pair remains in a sharp six-week uptrend and is again looking to break higher today.

• The decisive break above resistance at 1.8260/1.8320 has opened the next leg higher.
• The next important resistance area is 1.8800/1.9050.
• Momentum is strong with the RSI around 70. 

This suggests buying into weakness for further upside.

The initial support is at 1.8375 but the breakout band 1.8260/1.8320 is an important area of underlying demand now.

Below 1.8075 aborts the bullish outlook.

AUD/USD remains at a key crossroads

Given the weakness of the AUD but also the underperformance of the USD, it is interesting to see AUD/USD still trading around key pivot band resistance

Resistance at 0.6695/0.6785 has restricted an AUD rebound for a few weeks now.

The RSI continues to falter under 50, suggesting that rallies are struggling to hold traction.

However, there is a small run of higher lows forming, the possible latest at 0.6625. These are lending support above the key low at 0.6564.

Given the barrier of resistance overhead and the negative momentum configuration, we favour a retest of the 0.6564 low.

Support and resistance levels for Forex, Commodities, and Futures/Indices 

Data: MT5/IXOne

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