Food for RBA Hawks - Australia's Inflation Hits 30-year High

July 27, 2022 10:07

AUD traders have a full day ahead pricing in economic shifts after Australia reported higher-than-expected inflation of 6.1 percent for the second quarter. Rising inflation is food for the Reserve Bank of Australia (RBA) hawks, increasing market expectations that there will be a 0.75 percent rate hike when the central bank meets in August.

Australia also reports month-on-month Retail Sales tomorrow, Thursday July 28. The gauge is expected to have fallen from 0.9 percent in May to 0.5 percent in June, based on the assumption that consumers are more wary of high prices weighing on household budgets.

As these are fast-paced developments, there could be volatility in the AUD currency pairs.

Drivers of USD support and resistance

USD traders face headwinds coming from opposite directions, as the Federal Reserve is expected to raise key interest rate guidance from 1.75 percent to 2.5 percent today. Higher interest rates could give the USD a tailwind to underscore its strength. The potential volatility from the second-quarter GDP reading on July 28 could mean a tailspin for the USD if the world’s largest economy enters a technical recession, as is widely expected.

Another factor for USD traders to consider is the Durable Goods Orders benchmark for June, set for release later today. Durable Goods Orders are expected to have fallen from 0.8 percent in May to minus 0.4 percent in June, reflecting the impact of higher inflation on household and corporate budgets. If the benchmark surprises to the upside, the USD could see more support. Economic conditions appear to point to the downside, meaning another potential headwind for the USD.

Another complex economic scenario surrounds the EUR as the Eurozone releases the preliminary harmonised Consumer Price Index (CPI) for July. EUR traders already have plenty on their hands to price in the effects of slower growth and the conflict in Ukraine. If the annual CPI benchmark fell from 8.2 percent to 8.1 percent as expected, it could support the EUR.  

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 Quick Tip

How to read economic benchmarks?

Economic benchmarks can mean different things for currency trading, depending on the trader’s point of view. If you are bullish on a given currency, you might take a long position based on the core belief that it will gain value in the long term. A bearish approach to a given currency could mean going short, in other words, selling the currency on the core belief that it will decline in value.

In the current situation of push-and-pull economic conditions, traders also have to learn how to handle volatility as one contradictory economic release follows the other. Rising interest rates could be bullish for a currency, but falling GDP could be bearish. In these volatile conditions, risk management and hedging techniques are important factors because benchmark readings and expectations can be off the mark.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Sarah Fenwick
Sarah Fenwick Financial Writer, Admirals London

Sarah Fenwick's background is in journalism and mass communications. She has worked as a correspondent covering Swiss Stock Exchange news and written about finance and economics for 15 years.