Australian dollar loses ground despite solid confidence indicators

• Australia’s consumers and business confidence improve
• US inflation expected to fall to 3.1%

The Australian dollar is in negative territory on Tuesday. AUD/USD is trading at 0.6656 in the North American session, down 0.28%.

Consumer and business confidence rise 

Australia released business and confidence data on Tuesday, with both showing improvement. Westpac Consumer Confidence rose to 81.3 in June, up from 79.2 in May, a gain of 2.7%. As well, NAB Business Confidence climbed to zero in May, up from -3 a month earlier. Confidence levels for consumers and businesses are still weak, but the improvement is welcome news. The stronger numbers may have been aided by the Reserve Bank of Australia’s decision to pause rates last week, which provided some relief to households and businesses.

RBA Governor Lowe will be in the spotlight on Wednesday when he delivers a speech about monetary policy. Investors will be looking for some clues about future rate policy. Inflation fell in May to 5.6%, but that is still way off the Bank’s target of 2%.

The money markets were split ahead of the July decision on whether the RBA would raise rates or pause, and it’s uncertain what the central bank will do at the next meeting on August 1st. The money markets have priced a pause at 59% and 25-bp hike at 41%, according to the ASX RBA rate tracker.

Over in the US, there’s little doubt about the Federal Reserve plans, at least for the July 26^th meeting. The money markets have priced in a July rate hike at 92%, according to the CME FedWatch Tool. What happens after that? The answer could depend a lot on the June inflation report which will be released on Wednesday. Inflation is expected to fall from 4.0% to 3.1%, and core CPI is expected to drop from 5.3% to 5.0%.

If core CPI surprises and accelerates, I would expect that to increase the likelihood of a September rate hike. Three Fed officials spoke on Monday, and the message was that rate hikes have pushed inflation lower but the job is not done yet and more rate hikes are still necessary.

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AUD/USD Technical

• AUD/USD is testing support at 0.6666. This is followed by support at 0.6623
• 0.6732 and 0.6838 are the next resistance lines

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