AUD/USD tests the bull's commitments around 0.71 the figure, correction on the cards
- AUD/USD bears are testing commitments of a key support area on the daily chart.
- US CPI data will be the focus for the end of the week.
At 0.7098, AUD/USD is down over 1.25% on the day and is moving in hard on the next critical support area after breaking the prior higher lows of the rising daily trend. This leaves the focus on the downside although a meanwhile correction could be on the cards. With that being said, the markets are risk-off with Wall Street's benchmarks closing in the red on Thursday ahead of Friday's important inflation data.
Both US and European markets were a sea of red after the European Central Bank signalled it would hike interest rates next month for the first time since 2011. Consequently, eurozone borrowing costs hit an eight-year high when the ECB said inflation would remain "undesirably elevated" for some time. However, the ECB's steps to tackle inflation are not as hawkish as its counterparts at the Federal Reserve nor the Reserve Bank of Australia which earlier this week hiked more than expected.
Nevertheless, the mood was soured due to inflation concerns and the S&P 500 dropped 2.4%, putting it on track for its ninth losing week in the last 10, with losses accelerating late in the day ahead of a highly anticipated report in US Consumer Price Index report that is due Friday morning in the North American session.
Central Bank observers now expect the Federal Reserve to hike rates by 50 basis points next week, especially if U.S. CPI data on Friday confirms an elevated inflation reading.
The consensus forecast calls for a year-over-year inflation increase of 8.3%, unchanged from April. However, we could see more USD resilience in the very short-term ''especially if US core CPI surprises to the upside,'' analysts at TD Securities argued.
''Tactically, we see growing signs of an adverse risk backdrop in the coming weeks, as US real rates and equity correlations wane further and the USD peels away from relative US equity performance.''
A stronger CPI ''reading could put downward pressure on risky assets as investors look for the Fed to remain aggressive in its fight against inflation.''
That exposes US equities for which high beta currencies, such as the Aussie, would come under further pressure.
The Fed is scheduled to announce its next policy statement on Wednesday. A rate hike of at least 50 basis points from the central bank is already being priced in, according to CME's FedWatch Tool.
Meanwhile, as for the RBA, its to hike rates by 50 bps this month rather than 25 bps took the market by surprise, in a move that was described by the RBA Governor Phillip Lowe as “doing what is necessary” to ensure that inflation in Australia returns to target over time.
''A faster trajectory in RBA rate rises is a currency supportive factor,'' analysts at Rabobank said.''However, many other central banks are also hiking aggressively and this will dampen the impact on interest rate differentials. Moreover, the RBA’s sensitivity to growth risks, such as those that might stem from China’s zero Covid policy, is a potential headwind for the AUD.''
''On the upside,'' the analysts argue, ''the Australian economy should draw protection from a currently strong labour market, a high level of household savings and a healthy financial system. Pandemic savings in Australia are estimated to be in the region of AUD270 bln.''
''On the other hand.'' the analysts warned, ''there is uncertainty about the hit to consumers from higher mortgage rates, increased fuel prices and the broad hit to real incomes.''
''Bearing in mind the positive impact on Australian terms of trade as a result of higher commodity prices, we see scope for AUD/USD to be moderately higher vs the USD at year-end.''
AUD/USD technical analysis
The price is meeting a support area following the break of prior support and falling outside of the rising trendline support. The M-formation is a reversion pattern which could draw in the price towards the old support and neckline of the pattern. This too has a confluence with the 38.2% Fibonacci retracement level.