AUD/USD dips, retail sales next

The Australian dollar has started the week in negative territory. In the North American session, AUD/USD is trading at 0.7081, down 0.40%. The Aussie is coming off an excellent week, with gains of 2.0%.

Will Australian retail sales dip?

Australian consumer spending jumped 1.4% y/y in November, after two straight declines. The markets are braced for another decline in December, with an estimate of -0.3%. A decline in retail sales would mark the third drop in four months and could weigh on the Australian dollar.

The RBA meets on Feb. 7 and is expected to raise rates by 25 basis points, following a 25-bp increase in December. The cash rate currently stands at 3.1% and the markets are expecting a peak at around 3.6%, which translates into two more 25-bp hikes. The central bank has raised rates sharply but inflation is yet to peak. The CPI release for Q4 was a shocker, rising to 8.4% after a 7.3% gain in Q3. The aggressive rate-tightening cycle has, however, dampened economic growth. GDP in Q3 fell to 0.6% and that is expected to drop again Q4, with GDP projected to fall below 2% in 2023. House prices are down and business investment is weak. The uncertain economic outlook is putting pressure on the RBA to consider a pause in rate hikes, but this is unlikely to occur until the RBA sees clear evidence that inflation has peaked and is on its way down.

The Australian dollar has been on a tear, rising around 10% since Nov. 1. The outlook for the Aussie remains bright, both for domestic and global reasons. At home, the RBA will continue to raise rates in order to curb inflation. Abroad, China has reopened and that will increase demand for Australian exports. As well, commodity prices are high which is good news for the export sector and the Australian dollar.

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AUD/USD Technical

• AUD/USD is testing support at 0.7071. Below, there is support at 0.7000
• 0.7181 and 0.7252 are the next resistance lines

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