RBA Forecasts Prolonged Inflation Struggle; Aussie Dollar Under Pressure

Australia's Reserve Bank continues to emphasize that while inflation is slowing, it remains too high and will take time to return to the target range of 2-3%. Marion Kohler, head of the RBA's economics unit, mentioned at an economics conference that inflation is not expected to reach the midpoint of 2.5% until 2026, with a return to the target range anticipated by late 2025.

Despite the central bank holding interest rates steady at a 12-year high of 4.35%, there is an openness to further hikes, although market expectations suggest a potential downward move. Rising mortgage rates, coupled with high inflation and elevated tax payments, have been impacting household incomes, contributing to a more balanced economy in terms of demand and supply. This equilibrium is expected to result in subdued economic growth for the next couple of years, leading to a rise in unemployment to 4.4% in 2025.

Business conditions in Australia softened in January, particularly in the service sector, while price pressures increased after a brief cooling period. However, consumer sentiment rebounded to a 20-month high in February, driven by hopes that interest rates had peaked and positive changes to the government's planned tax cuts. The tax cuts, originally intended to address inflation and sluggish wage growth post-COVID-19, are now being reconsidered, potentially benefiting middle and low-income earners.

The Commonwealth Bank of Australia warns of continued financial strain on households and businesses due to the lagged effects of high interest rates. The bank highlights risks to the Australian economy, including slowing demand, persistent inflation, and geopolitical tensions. These factors are leading to reduced spending and a 3.5% decrease in overall household disposable income.

In the global context, the dollar reached its three-month peaks on Tuesday after the U.S. experienced higher-than-expected Consumer Price Index (CPI) in January compared to the previous year.

Inflation expectations in the US remain stable, with medium-term expectations returning to pre-pandemic levels. The Federal Reserve Bank of New York reports unchanged inflation expectations for one and five years, with a decrease in the projected rise for various spending areas. The Cleveland Fed also notes lower inflation expectations among business leaders.

The market's anticipation of a rate cut by the Federal Reserve in March has decreased to 15.5%, compared to over 75% a month ago. Fed Chair Jerome Powell remains optimistic about a "soft landing," aiming to manage inflation without causing a broader economic downturn. Balancing the risks of reigniting inflation by moving too soon and disrupting economic activity by waiting too long remains a challenge for Fed officials, prompting a prudent approach to rate policy. Consequently, the Australian dollar might face ongoing downward pressure, with the possibility of a minor reversal before entering a phase of fluctuation within a limited range.

Data for Technical Analysis (5H) CFD AUD/USD

Resistance : 0.6459, 0.6463, 0.6468

Support : 0.6449, 0.6445, 0.6440

5H Outlook

Source: Investing.com

Buy/Long 1 If the support at the price range 0.6439 - 0.6449 is touched, but the support at 0.6449 cannot be broken, the TP may be set around 0.6462 and the SL around 0.6434, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 0.6459 - 0.6469, TP may be set around 0.6476 and SL around 0.6444, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 0.6459 - 0.6469 is touched, but the resistance at 0.6459 cannot be broken, the TP may be set around 0.6448 and the SL around 0.6474, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 0.6439 - 0.6449, TP may be set around 0.6434 and SL around 0.6464, or up to the risk appetite.       

Pivot Points Feb 14, 2024 02:43AM GMT