The Australian dollar has posted slight losses on Tuesday. AUD/USD is trading at 0.6649 in the European session, down 0.15% on the day.
Australian Retail Sales Expected to Improve
Australian consumers have been in a frugal mood and have reduced their discretionary spending. Consumers have been squeezed by high borrowing costs and the high cost of living. Retail sales ticked upwards by only 0.1% m/m in April. The gain was negligible, considering that Australia’s population has been swelling due to an increase in immigration. The May retail sales report on Wednesday is expected to show some improvement, with a market estimate of 0.3% m/m.
RBA Minutes: Higher Rates Could Be Needed
The RBA minutes from the meeting earlier this month noted that the Board decided that the case to hold rates was stronger than for hiking. The RBA held rates at 4.35% for a fifth straight time but the Board raised concerns about the rise in inflation expectations and warned that it might have to raise rates if the current policy was not “sufficiently restrictive”.
The takeaway is that the RBA won’t be abandoning its “higher for longer” stance anytime soon. The second-quarter inflation report will be released on July 31 and will be a key factor in the RBA’s rate decision a week later.
The weak Australian economy could use a rate cut but the Reserve Bank of Australia is handcuffed due to rising inflation, particularly service inflation. CPI jumped to 4.0% in May, up from 3.6% in April and higher than the market estimate of 3.8%. The RBA may have to delay an initial rate cut until 2025 if there is no significant progress in the battle against inflation.
The RBA’s target range is 2% to 3% and the final phase of bringing inflation back down to the target range has proven elusive despite high interest rates. There is a real possibility that the RBA could raise rates in order to dampen inflation, a specter that consumers and businesses hope does not materialize.
AUD/USD Technical
- AUD/USD tested resistance at 0.6660 earlier. Above, there is resistance at 0.6699
- 0.6630 and 0.6591 are the next support levels