Australian Dollar Tad Softer After GDP; Is AUD/USD About to Reverse This Week’s Gains?

AUD/USD, Australian Dollar, RBA, GDP – Talking Points:

• Australian economy grew slower than expected in Q1.
• RBA’s Lowe highlights ‘significant risks’ to soft landing.
• What’s next for AUD/USD?

The Australian dollar was mostly softer against the US dollar after the Australian economy grew slower than expected in the first quarter of the year.

The economy grew 2.3% on-year in the January-March quarter, compared with 2.4% expected, slower than 2.7% in the last quarter of 2022. The growth marks the sixth consecutive increase, though has slowed undoubtedly in recent quarters as the massive 400 basis points increase in interest rates starts to trickle through the economy.

The Reserve Bank of Australia (RBA) Governor Philip Lowe acknowledged the risk of a more pronounced slowdown in the economy, saying the path to achieving a soft landing was narrow and ‘significant risks’ threaten the outcome at a conference in Sydney on Wednesday.

AUD/USD 5-minute Chart

Chart Created Using TradingView

The RBA unexpectedly hiked interest rates by 25 basis points at its meeting on Tuesday, taking the benchmark cash rate to 4.1%, and left the door open for some further tightening in its determination to return inflation to its target.

Inflation is only projected to return to the top of the RBA’s 2-3% target range by mid-2025, and the minimum wage rise could further delay achieving the price target. Lowe reinforced the central bank’s intention to keep raising rates if needed to ensure inflation returned to its target range even if it pushed the jobless rate higher from around five-decade lows.

Australia GDP growth

Source data: Bloomberg; Chart prepared in Excel

Headline inflation rose 6.8% on-year in April and 7.0% in the first quarter, down moderately from a peak of 7.9%. Before Tuesday’s meeting, the market was anticipating the benchmark rate to reach 4.18% by September, but the odds are now a high chance of one more 25 basis points RBA rate hike, with the terminal rate projected at 4.32% by the end of the third quarter.

Key focus is now on China trade data due later Asia Wednesday morning. Imports in the world’s second-largest economy are expected to have contracted 8% on-year in May, following a drop of 7.9% in April. Earlier this month, factory activity contracted faster than expected in May on weakening demand, clouding the outlook on the economy, Australia’s largest export destination.Still, reports that China is working on new measures to support the property market have rekindled hopes of targeted stimulus to support the economy.

AUD/USD 240-minute Chart

Chart Created Using TradingView

On technical charts, AUD/USD’s break toward the end of last week above resistance at the May 30 high of 0.6560 has eased the immediate downward pressure, potentially laying the foundation for a renewed upswing. However, AUD/USD needs to break above the crucial barrier at 0.6805 for the bearish backdrop to reverse. Immediate barrier is at the mid-May high of 0.6675, coinciding with the 200-day moving average.

— Written by Manish Jaradi, Strategist for DailyFX.com

— Contact and follow Jaradi on Twitter: @JaradiManish