AUD/USD stems the bleeding, US eyes GDP and jobless claims

• Market pricing for RBA pause jumps higher
• US releases GDP, unemployment claims today
• Banking turmoil lengthens odds of Fed hike

The Australian dollar is in positive territory today, ending a nasty slide of 100 points and falling to a 6-week low. The Aussie is trading at 0.6621, up 0.28% on the day. The US releases GDP and unemployment claims.

Australian inflation supports RBA pause

The drop in inflation in the first quarter was music to the ears of Reserve Bank of Australia policy makers. So much so that expectations have risen that the RBA could extend its pause on rate hikes at the May 2^nd meeting. Headline inflation fell from 7.8% to 7.0% in Q1 but even more importantly, the core rate also slowed from 6.9% to 6.0%, its lowest level since December 2021. The market pricing for a second consecutive pause at the May 2^nd meeting rose from 84% prior to the inflation release to 100%, according to ASX RBA Rate Tracker.

There are nevertheless some voices projecting a terminal rate of 3.85%, which would mean one final 25-basis point hike. The argument in support of another hike is that inflation is much higher than the 2-3% target and the labour market is very tight. There are also concerns of a price wage spiral.

RBA Governor Lowe has pledged to bring inflation back down to the target and Treasurer Chalmers said that inflation was “unacceptably high” after the inflation release and the upcoming budget would provide relief to households struggling with the cost of living crisis. The bottom line is that inflation is clearly heading the right way but the battle is far from over.

Will banking woes torpedo a Fed hike?

First Republic Bank is back in the headlines, as the bank’s shares have plunged some 90% this week after an earnings report showed that deposits plunged by 40% in the first quarter. In March, a group of banks deposited $30 billion with First Republic, but that hasn’t solved matters and a broad restructuring plan may be needed.

Will the latest turmoil in the banking sector force the Fed to pause at next week’s meeting? The markets still think that the Fed will go ahead with a 25-basis point hike, although the odds have slipped from 84% a week ago to 76% at present. We can’t know for sure what the Fed is thinking, as a blackout period on Fedspeak is in effect ahead of the meeting. The banking crisis last month may have weighed on spending and growth, which would lessen the need for additional rate hikes. If the banking turmoil worsens ahead of the meeting, there will be more pressure on the Fed to take a pause in rate hikes.

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AUD/USD Technical

• AUD/USD tested resistance at 0.6618 earlier today. The next resistance line is 0.6714
• 0.6572 and 0.6459 are providing support

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