The Australian dollar is trading in a lower range against the US dollar during the Asian session on Friday, with the exchange rate currently hovering below the 0.6900 level.
As the third quarter begins, market focus is shifting back from geopolitical concerns to monetary policy and economic growth prospects. The Middle East conflict has not become the persistent macroeconomic driver many feared, oil prices have retreated, and traders are once again weighing the relative policy paths of the Reserve Bank of Australia and the US Federal Reserve.
Fundamental Outlook: Early Signs of a Slowdown in Australia, but Inflation Remains a Sticking Point
Recent data has started to turn against the hawkish stance of the RBA. While inflation remains above the central bank's comfort zone, signs of weakness have emerged in consumer confidence and business conditions, with employment and household spending also experiencing setbacks. Data from May briefly reinforced bearish expectations for AUD/USD, showing a contraction in household spending, the unemployment rate rising to a four-year high, and employment figures missing expectations.
However, June data has largely reversed these concerns: spending rebounded, the unemployment rate edged lower, and employment recovered. Although the overall trend for unemployment is still rising, the latest data does not suggest the economy is on the brink of collapse.
Inflation remains a prominent issue. Core CPI, which excludes volatile items, rose year-on-year to 3.6%, even as headline CPI eased to 4.0%. Both metrics remain well above the RBA's 2% to 3% target band. Unless inflation decelerates more rapidly, the RBA is likely to maintain a relatively hawkish bias—even if it ultimately chooses not to raise rates.
RBA Outlook: Is the Rate-Hike Cycle Over?
The RBA kept the cash rate unchanged at 4.35% at its June meeting, following three consecutive hikes totaling 75 basis points. While policymakers retained mildly hawkish language, it was a step back from the more forceful rhetoric accompanying previous rate increases. RBA cash rate futures imply a peak rate of 4.50% by December, only 15 basis points above the current rate.
Three of the four major banks expect the RBA to eventually pivot to easing after holding steady, with Westpac being the only major bank forecasting a further rate hike.
With crude oil prices now down 37.5% from their post-war peak and only about 20% above pre-war levels, inflationary pressures, while still elevated, are far less severe than when the RBA was signaling an urgent need for hikes.
Therefore, further rate increases should be considered a low-probability scenario. The RBA is expected to keep rates on hold throughout the third quarter, leaving the Australian dollar more exposed to risks if the Fed resumes policy tightening.
Fed Outlook: Markets Price in Further Rate Hike Risks
With the Federal Reserve Chair transitioned from Powell to Warsh, markets increasingly believe the Fed's next move could be a rate hike.
Fed funds futures indicate a 63.4% probability of a hike in September, with the probability for a December hike rising to 81.7%. The final first-quarter GDP reading was revised up to an annualized 2.1%, while core PCE inflation remains stubbornly high at 3.4% year-on-year, well above target. Retail sales continue to exceed expectations, business surveys show expansion, with elevated "prices paid" components indicating persistent inflationary pressures.
Persistent inflation, resilient labor market data, and hawkish commentary from FOMC members have prompted traders to rebuild expectations for further Fed rate hikes this year.
The main risk to this outlook is a significant deterioration in US economic data, which could eliminate expectations for further tightening, weaken the US dollar, stabilize the Australia-US yield spread, and thus allow AUD/USD to outperform its overall neutral seasonal tendency.
On the daily chart, the medium-to-long-term uptrend for AUD/USD has ended, with a sustained decline from the high of 0.7277. The current price has broken below short and medium-term moving averages, with only the long-term 200-day MA at 0.6857 providing weak support. The pair has transitioned into a downtrend. The 20-day, 50-day, and 100-day MAs are all turning downwards, creating layered resistance. Each minor rebound is suppressed by the short-term MAs, with successive lower highs forming a clear bearish pattern.
In terms of indicators, the MACD is operating in bearish territory below the zero line, with the DIFF line consistently below the DEA line and green histogram bars continuing to expand, indicating no significant exhaustion of downward momentum. The RSI reading is 28.84, falling into the oversold zone below 30, suggesting a short-term need for a technical corrective bounce, but no bottom divergence reversal signals are present yet.
The exchange rate for AUD/USD is 0.6895/96.
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