Aussie sinks as risk sentiment slides

The Australian dollar has started the week with sharp losses. AUD/USD is trading at 0.6933, down 1.55% on the day.

US recession fears send Australian dollar tumbling

The week ended with a disappointing US inflation report. Headline inflation in May rose to 8.6% YoY, up from 8.3% in April. Core inflation eased to 6.0%, down from 6.2%, but that was little comfort for the markets, which are showing signs of panic over entrenched inflation. The result was that risk appetite fell, sending the US dollar surging against the major currencies.

With no sign of an inflation peak, it’s clear that the Federal Reserve will have to keep its foot pressed to the floor when it comes to upcoming rate hikes. This makes it likely that the Fed will deliver 50-bp hikes in June, July and September. Just a couple of weeks ago the Fed signalled it would take a break in September, but that now seems a luxury it can’t afford, given that inflation hasn’t eased.

There have been calls for the Fed to deliver a massive 75-bps salvo at Wednesday’s meeting, but such a shock move seems unlikely, especially in the current turbulent economic environment. If Fed Chair Powell is looking to send a hawkish message to the markets, he could hint at the meeting press conference that a 75-bp increase is on the table if inflation doesn’t ease. Such a warning would likely boost the US dollar.

There are some key releases out of Australia this week, kicking off with NAB Business Confidence on Tuesday. The indicator slowed to 10 points in May, down from 16 in April. If the downtrend continues, the Australian dollar could continue to lose ground. This will be followed by Westpac Consumer Sentiment on Wednesday and the May employment report on Thursday.

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AUD/USD Technical

• AUD/USD is testing support at 0.6973, followed by support at 0.6902
• There is resistance at 0.7181 and 0.7110

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