Aussie shrugs off soft retail sales, inflation next

The Australian dollar showed little reaction to the release of Australian retail sales earlier today. In the European session, AUD/USD is trading at 0.6600, down o.15%.

Australia’s retail sales sink in December

The markets were braced for a soft December retail sales but the damage was worse than expected. Retail sales fell by 2.7% m/m, following a downwardly revised 1.6% gain in November and much weaker than the consensus estimate of -1%.

This was the steepest decline in retail sales since August 2020, as consumers did their Christmas shopping early and took advantage of Black Friday sales in November. Any hopes that Boxing Day sales in December would ease the pain were dashed, as the November gain came at the expense of December. Retail sales posted a weak gain of 0.8% y/y, the lowest since August 2021. A recession may not be far away and the Reserve Bank of Australia is expected to hold rates at the February 6 meeting. The markets have priced in a 70% probability of a rate cut in August.

The RBA has stressed that upcoming rate decisions will be data-dependent, and Wednesday’s quarterly inflation will be critical. Inflation has been falling and the consensus estimate for the fourth quarter stands at 4.6% y/y, compared to 5.4% in the third quarter. Goods and services inflation and the core inflation rate are moving lower but remain well above the RBA’s target band of 2%-3%. If the inflation rate misses the estimate, the Australian dollar could show volatility.

The US releases key employment data this week, starting with the ADP employment report, which is expected to drop from 164,000 to 145,000. The nonfarm payrolls report will be released on Friday and is expected to decline to 180,000 in December, down from 216,000.

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AUD/USD Technical

• AUD/USD is testing support at 0.6599. Next, there is support at 0.6582
• There is resistance at 0.6628 and 0.6645

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