Australian dollar drifting ahead of RBA decision

The Australian dollar is steady on Monday. AUD/USD is trading at 0.6605 in the European session, down 0.14% on the day. Last week, the Australian dollar rose as much as 1.8% but pared most of these gains.

RBA expected to hold rates

The Reserve Bank of Australia will deliver its rate announcement early Tuesday and is widely expected to hold rates for a fifth straight time. All four major Australian banks expect the RBA to stay on the sidelines. The RBA has kept rates at a 12-year high of 4.35% and doesn’t feel confident enough to start lower rates due to sticky inflation. First-quarter inflation was stronger than expected, rising 3.6% y/y. This was down from 4.1% in Q4 2023 but above the market estimate of 3.4%.

The RBA has maintained a hawkish hold stance and Governor Bullock reiterated last week that the central bank could raise rates if inflation does not fall as expected. A rate hike is an unlikely scenario, given that the economy has been weakening, but the fact that a rate hike is on the table means that a rate cut is not around the corner and could be delayed until 2025.

Besides sticky inflation, another factor which complicating plans to lower rates is the tight Australian labor market. Unemployment is under 4% and swelling immigration means that job vacancies remain tight.

In the US, the UoM consumer sentiment index fell for a third successive month to 65.6 in June. This was down from 69.1 in May and shy of the market estimate of 72. Inflation expectations remained unchanged at 3.3%, another signal that inflation remains sticky and the Fed will have a tough time bringing inflation down to the 2% target.

AUD/USD Technical

• AUD/USD is testing resistance at 0.6617. Above, there is resistance at 0.6643
• 0.6590 and 0.6564 are the next support level

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