Australian GDP Slowed but Remains Resilient; AUD/USD Soft on Renewed USD Strength
Resilient Australian Economy
Economic activity grew at a slower in the first quarter of the year, as exports fell and household spending growth continued. In particular, Q1 GDP grew 0.8% quarter-over-quarter, from 3.6% prior, while on yearly basis Q1 GDP rose 3.3%, from 4.2% prior.
Despite the slower growth, these figures are solid and in line with the central bank's projections [1] and show that the Australian economy is resilient, especially if we take into account the Covid-19 lockdowns in China, which is Australia's biggest trade partner.
Furthermore, the labor market is strong, with Unemployment having dropped to 3.9% in April, which is the lowest level since 1974. Inflation on the other hand is high, since headline CPI had jumped 5.1% in Q1 year-over-year, with the Reserve Bank of Australia expecting it to peak at 6% in the second half of 2022 [1].
RBA Monetary Tightening
The Reserve Bank of Australia (RBA) had been one of the least hawkish major central banks, but has been shifting its stance this year and in May, it hiked interest rates for the first time in more than ten years.
Officials increased rates by 25 basis points and signaled further tightening ahead, saying that lowering inflation "will require a further lift in interest rates over the period ahead".[2]
Today's Gross Domestic Product (GDP) figures along with the strong labor market and high inflation, we believe support RBA's prospect for more interest rate hikes. The bank's next monetary policy decision is expected next week, on Tuesday June 7.
Hawkish Fed
The US Federal Reserve is far ahead in policy normalization, having already delivered two rate hikes, but had seemed a bit conservative, as Chair Powell had ruled out more aggressive 75 basis points increases, pointing to half-percentage moves which "would be on the table at the next two meetings", after the last meeting. [3]
On Monday, governor Waller went a step further, as he expressed his support for such adjustments for "several meetings" and for interest rates "at a level above neutral" by the end of this year [4], while Chair Powell himself has tried recently to reaffirm the central bank's hawkishness and its resolve to fight inflation.
However, inflation has moderated as headline CPI eased to 8.3% in April (year-over-year), from 8.5% prior and Core PCE deescalated to 4.9% in the same month, from 5.2% prior. Along with the 1.5% GDP contraction in Q1, as per last week's preliminary data, a more restrained stance may be make sense for the Fed.
AUD/USD Analysis
The pair has posted an impressive recovery since mid-May, from its two-year lows (0.6827), closing last week above the 38.2% Fibonacci of its 2022 High/Low drop and the EMA200 (black line). This gives it the ability to push for the 200Days EMA (0.7270), but will likely need fresh impetus for that and a breach that could open the door to mid-0.7300s.
However, the relief rally pauses this week and the AUD/USD faces difficulties, as the Fed reasserts its hawkishness and sentiment soured after yesterday's record preliminary CPI of 8.1% for Eurozone in May, which sparked renewed inflation fears.
The Aussie is in risk of returning below the EMA200, which could lead to further weakness towards mid-0.7000s, but don't thing that a steeper decline that could test 0.6990 is easy at this point.
Markets now turn to series of Fed speakers for more insights in the bank's thinking and to US PMIs, while Australia's trade balance is expected on Thursday.
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
References
| Retrieved 01 Jun 2022 https://www.rba.gov.au/publications/smp/2022/may/ | |
| Retrieved 01 Jun 2022 https://www.rba.gov.au/media-releases/2022/mr-22-12.html | |
| Retrieved 01 Jun 2022 https://www.federalreserve.gov/monetarypolicy/fomcpresconf20220504.htm | |
| Retrieved 28 Nov 2023 https://www.federalreserve.gov/newsevents/speech/waller20220530a.htm |
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