The Australian dollar is in the grip of a contradictory fundamental background. On the one hand, there are rumors about the end of the US-China trade war, on the other, the prospects for lowering the interest rate by the Reserve Bank of Australia against the background of slowing inflation. In addition, the AUD/USD pair is forced to respond to the ubiquitous growth of the US currency, which so far has been supported by Federal Reserve head Jerome Powell. In turn, the growth of the commodity market slowed, the cause of which also includes the strengthening of the greenback. As a result, the "aussie" succumbed to the influence of bears and dropped to the lower limit of the price range, that is, to the key support level of 0.7000.
During the Asian session, the sellers tried to break through this target, but failed. For the AUD/USD pair, the support level of 0.7000 has played a special role - over the past few years (to be more precise, since the beginning of 2016), bears have made regular attempts to gain a foothold in the 69th figure and lower, but in each case the price has returned to the level above 70. In other words, a powerful informational occasion is needed for the development of a downward trend, which will either greatly strengthen the position of the greenback or sharply weaken the aussie. At the moment, the bears have no such arguments.
At the same time, the nervousness of AUD/USD traders is fully justified: as early as the next meeting of the Reserve Bank of Australia will take place next Tuesday, that is, on May 7. In anticipation of this event, the market began to think about the likelihood of interest rate cuts. According to some experts, the RBA may decide to take this step in May.
Australian inflation is really surprised by the low results. Let me remind you that the consumer price index on a monthly basis suddenly dropped to zero, while analysts expected it to decline only to 0.2%. In annual terms, the indicator growth slowed to 1.3%, although the overall forecast was at 1.5% (from 1.8% in the fourth quarter of last year). Core inflation rose by only 0.2% during the first quarter (after seasonal adjustments) - this fact again disappointed market participants, who expected the growth of the key indicator by 0.4%.
On an annualized basis, baseline quarterly inflation fell to 1.4%, well below the minimum target value of the Australian regulator. In other words, inflation showed a decline "on all fronts", not justifying even the weak forecasts of experts. The growth rate of the Australian economy is not encouraging either - if in the first quarter of last year Australia's GDP was at 1.1% (quarterly), in the second quarter it fell to 0.9%, in the third to 0.3%, and finally, in the fourth - up to 0.2%. Similar dynamics is observed in the annual expression of the indicator.
Therefore, the RBA's reaction to the latest releases is not difficult to predict - the rhetoric of central bank's members will be 100% dovish-like. But at the same time, the question of lowering the interest rate still remains open. Unlike the RBNZ, which at the previous meeting actually announced easing of monetary policy, the Australian regulator chose to wait. At the April meeting, the head of the RBA, Philip Low, even stated that the global financial conditions "remain favorable," as do the prospects for the world economy. According to him, the central bank expects a further decrease in unemployment and an increase in the level of wages, and as a result - inflation indicators. The minutes of this meeting, which was published two weeks later, were also quite discreet and neutral: at least, it did not contain any hints of a rate cut in the near future.
In their public speeches, members of the Australian regulator are also not in a hurry with the conclusions regarding the rate cut. Although the deputy head of the RBA, Guy Debelle, who spoke last week, allowed monetary policy easing, judging by his rhetoric, he is not ready to take this step at the next meeting. According to him, the central bank "can theoretically reduce the interest rate if necessary," but so far the regulator needs to "track the discrepancy between a slowing economy and a strong labor market in Australia."
In my opinion, during its May meeting, the Reserve Bank of Australia will take a wait-and-see attitude, although it may allow a rate cut before the end of this year. We should not forget about the positive side of Australian data. In addition to strengthening the labor market, production activity in the country has significantly increased: according to the latest data from AIG, this indicator increased from 51 to 54.8 points.
In addition, the Reserve Bank of Australia is unlikely to take any decisive steps before the resolution of the US-China trade negotiations. It will be their 11th round next week - and, according to numerous sources, the parties are close to concluding a historic trade deal. According to rumors, the US president agreed to "remove the brackets" of the dialogue a number of significant differences that hampered the entire negotiation process (above all, these are issues in the field of intellectual property protection). In other words, the likelihood of a truce is now quite high - according to preliminary data, the agreement can be announced as early as next Friday.
Thus, in the near future, the Australian dollar may receive substantial support - both from the RBA and from the external fundamental background. If the Australian regulator is patient and Washington and Beijing announce a deal, AUD/USD bears will not be able to keep the pair within the 69th figure, after which the price will return to its usual range of 0.70-0.7110 or higher - 0.7110 -0.7230.
