The Australian Dollar (AUD) is facing challenges as the Reserve Bank of Australia (RBA) raises alarms over persistent high inflation. RBA Governor Michele Bullock warned that high inflation could hurt the Australian job market, and without controlling inflation, unemployment rates may rise significantly. This announcement has led to further AUD declines, as traders are increasingly cautious about the economic outlook.
Key Takeaways
High Inflation and Job Risk: The RBA's warning on inflation staying above target highlights the risk of rising unemployment in Australia, which will weigh on economic sentiment.
AUD Declines: The Australian Dollar remains under pressure as domestic inflation concerns, alongside weak global economic data, lead to further declines against the US Dollar.
Technical Analysis: From a technical standpoint, the AUD/USD pair remains vulnerable to further declines, with critical support at 0.6575. Immediate resistance lies at 0.6731 and 0.6742.
Global Impact: With China’s economic slowdown and US market uncertainty, the AUD is likely to remain volatile in the near term, influenced by both domestic and international developments.
RBA's Stance on High Inflation and Jobs at Risk
In a recent speech, RBA Governor Michele Bullock made it clear that maintaining low unemployment will become increasingly difficult if inflation remains above the target of 2-3%. She emphasized that the rate-setting board remains vigilant about inflation risks and that monetary policy will continue to be "sufficiently restrictive" until inflation stabilizes within this band.
Despite inflation coming down from its peak, Australia's core inflation remains at a worrying 3.9%, which is still above the RBA's comfort zone. As inflation lingers, the impact on lower-income households and young Australians is becoming more severe. Governor Bullock noted that disinflation could lead to long-lasting costs for households and that high inflation disproportionately affects vulnerable groups in the country.
Bullock reiterated that while other central banks, such as those in New Zealand and Canada, have begun cutting interest rates, Australia is still hesitant to do so, owing to the risk of undoing recent labor market gains. With unemployment sitting at 4.2%, the focus remains on controlling inflation before any drastic monetary easing measures are considered.
AUD Declines Amid Economic Data and RBA Warnings
Following the RBA's cautious outlook, the AUD declines further against the US Dollar, weighed down by both domestic and global factors. Australia's trade surplus data showed improvement in July, exceeding expectations, but this wasn’t enough to counter the negative sentiment caused by RBA's comments on inflation.
Additionally, weaker-than-expected economic data from China, one of Australia's key trading partners, adds to the downward pressure on the Australian Dollar. China's Services Purchasing Managers' Index (PMI) fell from 52.1 in July to 51.6 in August, contributing to concerns over Australia's trade prospects and economic stability.
On a broader scale, the Federal Reserve's stance on interest rate cuts and the US labor market's performance also impacted the AUD. With US job openings falling to a three-year low and concerns rising over the economic slowdown, the strength of the US Dollar has created a headwind for the Australian currency.
AUD/USD Technical Analysis
From a technical perspective, the AUD declines remain in line with bearish signals. The Australian Dollar currently trades around 0.6720 against the US Dollar, sitting below the nine-day Exponential Moving Average (EMA), which suggests that the short-term outlook remains bearish. Additionally, the 14-day Relative Strength Index (RSI) still hovers above the 50 mark, which indicates some underlying bullish momentum; however, it's not strong enough to reverse the overall trend.
If the downward pressure persists, the AUD/USD pair could test the critical support level near 0.6575. A break below this level could trigger further declines toward the lower support of 0.6470.
Conversely, any recovery attempt by the AUD may face immediate resistance near the 14-day EMA at 0.6731, followed by stronger resistance at the nine-day EMA at 0.6742. A sustained move above these levels is necessary for the AUD to recover meaningfully.
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