Australian Dollar tallied another losing day, focus on labor data

AUD/USD shows a further decrease since Tuesday falling below 0.6730.
Australian labor data will dictate short-term dynamics that might prompt a more hawkish RBA.
Strong US data might now be enough to close the divergence between the Fed and RBA stance.

The Australian Dollar (AUD) continued to lose ground against the USD on Tuesday, falling to 0.6730. After an initial decline in Monday's session, the AUD has extended its losses as profit booking by investors heightens. However, the fundamental outlook hints at the AUD's potential resilience against the USD amidst monetary policy divergences between the Federal Reserve and the Reserve Bank of Australia (RBA).

Despite signs of frailty in the Australian economy, stubbornly high inflation has put the brakes on the RBA's intention of lowering interest rates. It is anticipated that the RBA will be one of the last central banks among the G10 countries to begin cutting rates, a factor that might limit the AUD's downside and extend its gains.

Daily digest market movers: AUD may see an upside as the labor market could justify a hike

Investors are keeping a close eye on the Australian Employment data due for release on Thursday. The report is forecasted to show that in June, 20,000 job-seekers found employment, compared to 39,700 in May.
If the unemployment rate remains steady at 4.0%, it signifies a robust labor market that may further fuel expectations of the RBA's policy-tightening stance.
On the US data front, retail sales remained flat at 0.0%, though the previously reported increase of 0.1% was revised upward to 0.3%.
Retail Sales ex Autos rose by 0.4% after the 0.1% decline in May. That same -0.1% has been revised to 0.1%.
Market pricing currently indicates nearly a 50% chance of the RBA increasing rates in either September or November. Conversely, the odds of a rate cut by the Federal Reserve in September stand at 90%, subject to incoming data.

Technical Analysis: AUD/USD enters consolidation phase, overall outlook remains positive

Despite the recent losses, the AUD/USD's outlook remains positive, with the pair retaining levels not seen since January. Following a rally of over 1.5% in July, indicators including the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) approached overbought territory which prompted a slight correction.

The target for the buyers is to sustain between the 0.6700-0.6730 range while support levels are marked at 0.6680 and 0.6650.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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