The AUD/USD pair has dropped for the third consecutive day, hovering around 0.7060 during Asian trading on Friday. Chris Kent, the Assistant Governor of the Reserve Bank of Australia (RBA), stated on Thursday that the latest interest rate hikes are having their desired impact. Nonetheless, he cautioned that additional rate increases could occur if new inflationary pressures emerge.
RBA tightening may challenge demand amid a housing slowdown
BNY Mellon analysts noted that the previous interest rate increases from the RBA are now visibly affecting the economy, citing factors like “higher borrowing costs, increased mortgage payments, weaker housing market conditions, and a strengthened Australian dollar” as contributors to tighter financial conditions. They also indicated that the aggregate demand needed to return inflation to target levels is diminishing. This scenario of decreased housing activity combined with a stronger currency aligns with a somewhat restrictive monetary environment, which is thought to be helping push inflation back within the RBA’s target range.
Even with downward pressure on the Australian dollar (AUD), the potential decline for the AUD/USD pair might be limited, considering the weakening of the US dollar (USD) following a disappointing US inflation report. Attention is now shifting toward the upcoming July retail sales data from the US, due later on Friday.
In terms of inflation, the Bureau of Labor Statistics (BLS) announced that wholesale prices for goods and services were unchanged in July, which came after a 0.1% downward revision in June and slower growth than expected at 0.2%. The core producer price index (PPI), which excludes volatile food and energy prices, rose by 0.2%, slightly missing market expectations of 0.3%. Year-over-year, the overall PPI increased by 4.7% in July, while the core PPI rose 4.2% during the same period.
These signs of cooling inflation have shifted predictions regarding Federal Reserve policy. According to the CME FedWatch tool, the market is now estimating a 34.8% probability of an interest rate hike at the Federal Reserve’s next meeting in September, a decrease from 40% right after the PPI data was released.
