A week ago, the Reserve Bank of Australia kept interest rates steady at the record low 1.50%, as widely expected. In opting to keep rates unchanged, the RBA cited several concerns, including low wage growth and a strong Australian dollar that may be expected to weigh on inflation, economic output, and employment.
Prior to that rate decision, RBA Governor Philip Lowe stated in August that: "the next rate move will be up, rather than down, but it will not be for some time." This hesitancy to tighten monetary policy has pegged the RBA as somewhat more dovish compared to other major central banks that are on a tightening path.
One of those other central banks is clearly the US Federal Reserve, which has been perceived as becoming increasingly hawkish in recent weeks. This outlook was reinforced last week when US employment data, though disappointing expectations for job creation due to hurricane disruptions, showed an unexpected jump in wage growth.
This week, key economic releases out of the US will further clarify inflation conditions and the Fed’s policy stance. Wednesday features the release of minutes from the September FOMC meeting, in which interest rates were kept unchanged as expected, but where the Fed struck a relatively hawkish tone with respect to future monetary policy. The actual extent of this hawkishness should be further revealed on the release of the meeting minutes. Thursday and Friday then bring two key inflation measures, the Producer Price Index (PPI) and Consumer Price Index (CPI), respectively.
The contrast between the RBA and Fed with respect to recent central bank policy stances has contributed significantly to the AUD/USD slide from the early-September high above 0.8100. During the course of this slide, the currency pair has broken down below a key uptrend line extending back to early June, the 50-day moving average, and several key support levels.
Most recently, AUD/USD has settled just above major support around the important 0.7750 level. This level previously served as strong resistance for the latter part of 2016 and into this year before it was broken to the upside in mid-July. On Tuesday, price bounced off that support as the US dollar pulled back further within its recent rally. Despite this bounce, the trend for the currency pair, as driven largely by monetary policy divergence between the Fed and RBA, remains pointed to the downside. Any continuation of this downtrend would be contingent upon a break below the noted 0.7750 support level. In the event of such a breakdown, the next major downside targets are at the 0.7600 and 0.7500 support levels.
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