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Aussie rises as investors await inflation data 

May 28, 2024

Key points: 

  • Australian dollar appreciates past $0.665, marking a three-day winning streak. 
  • Domestic inflation figures and cautious retail sales data influence interest rate outlook. 
  • Market bets on the Reserve Bank of Australia maintaining high rates longer. 

The Australian dollar (AUD) climbed past $0.665 on Monday, marking its third consecutive session of gains. Market participants are bracing for upcoming domestic inflation figures, which could significantly influence the interest rate outlook.

The appreciation of AUD is also supported by a broad pullback in the US dollar (USD) and strong carry demand against the Japanese yen (JPY). 

Chart displaying AUD/USD exchange rate at 0.66606 with a trend of 0.58%, reflecting the Australian dollar rising as investors await domestic inflation data. The chart features moving averages (MA) and MACD indicators. Despite disappointing retail sales, the weak USD and strong carry trade demand support the AUD. Image hosted by VT Markets, a forex CFDs brokerage.

Picture: AUD climbs past $0.665, as observed on the VT Markets app

Domestic and global external influences sway the Aussie  

Recent data showing that Australian retail sales rose less than expected in April highlighted cautious consumer spending. This cautious spending reflects the uncertainties in the economic environment, which could impact inflation trends and monetary policy decisions. 

Externally, the AUD benefited from a weaker USD. The broad pullback in the USD provided support to the AUD, as did strong carry trade demand against JPY. This external environment has contributed to the recent strength of AUD. 

Markets are currently betting that the Reserve Bank of Australia (RBA) will maintain higher interest rates for an extended period, with a rate cut not fully priced in until May next year.

The latest RBA meeting minutes revealed that the board considered raising rates in May but ultimately decided to keep the policy steady.

The minutes also indicated that future changes in the cash rate could not be ruled in or out, given the increased risk of inflation remaining above target for an extended period. 

Market outlook for the Australian dollar in May 

AUD may experience further volatility as market participants react to the upcoming domestic inflation figures. If inflation remains high, it could strengthen AUD further due to expectations of prolonged high-interest rates.

On the other hand, if inflation data shows signs of easing, AUD might stabilize as market expectations adjust on interest rate policy by the RBA.  

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