Aussie shrugs off soft construction data

The Australian dollar has stabilized today after sharp losses on Tuesday. In the European session, AUD/USD is trading at 0.6853, unchanged on the day.

Construction Work Done slides

Australia’s construction sector continues to post soft numbers this week. Construction Work Done fell 3.8% in Q2 (vs -0.9% in Q1), shy of the market consensus of 0.9%. This key indicator has been struggling, with three declines in the past four quarters. On Tuesday, Building Permits tumbled 17.2% in August (vs -0.6% in July), well off the estimate of -3.1%. The weak data should serve as a reminder the Australian economy is showing signs of slowing down, as the Reserve Bank of Australia’s aggressive tightening cycle is showing results.

The RBA meets next on September 6th. In all likelihood, the RBA will deliver a 0.50% increase, as inflation hasn’t shown any signs of peaking. In the second quarter, inflation rose to 6.1%, up from 5.1% in Q1. Policy makers are hoping to avoid a recession and guide the economy to a soft landing, but the central bank, like the Fed, has made clear that its paramount goal is to curb inflation and avoid inflation expectations from becoming anchored.

In the aftermath of Fed Chair Powell’s no-nonsense speech at Jackson Hole last week, the markets seem to have heard Powell’s message loud and clear. The markets have priced in a 75 basis point hike at 72.5%, with a 50bp increase at 27.5%, according to CME’s FedWatch. Just yesterday, the odds were 65%-35%, and we can expect further movement in market pricing as investors look for clues as to what the Fed has planned at the September 21^st meeting. The Fed has stated that its rate decisions will be data-dependent, which means that Friday’s non-farm employment report could be a market-mover.

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AUD/USD Technical

• AUD is testing support at 0.6830. The next support level is 0.6766
• There is resistance at 0.6919, followed by resistance at 0.6983

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