FUNDAMENTAL ANALYSIS
Jason Chen
AUD/USD
On Friday 10th June, the US Bureau of Labor Statistics released its CPI data for May, which revealed that the headline figure had risen by 1% month-on-month and that the annualised rate of inflation increased to 8.6%, the highest level since 1981. To combat surging inflation, the Federal Reserve has accelerated its plans to tighten monetary policy by announcing the largest rate hike since 1994 of 75 basis points to the Federal Funds Rate, exceeding most Wall Street estimates of a 50 basis point hike. This news, alongside US equity markets recently entering a bear market, has led some to believe that the US economy may enter a recession in late 2022 or early 2023. This sentiment is also reflected amongst consumers, with the US consumer confidence index falling to a 3-month low during May.
Although the RBA faces the same inflationary challenges, the Australian economy may be performing slightly better than our American counterparts. As the ABS only releases inflation data quarterly, the RBA estimates that the annualised rate of inflation will be 5.5% by the end of the June quarter, which is significantly lower than what the US is experiencing. Moreover, the Australian labour market continues to be strong, with the unemployment rate hovering at an all-time low of 3.9% and underemployment falling to 40-year lows. All this points to the Australian economy being fairly strong despite global economic headwinds in the form of significant cost-push inflation, particularly in the Food and Energy sector which has an impact on all households. Therefore, it will be interesting to see in 2 weeks whether the RBA follows the Federal Reserve with its monetary tightening in a bid to control the surging inflation.
EUR/USD
For the first time in more than 11 years, the European Central Bank has stated its intention to raise its key interest rate by 0.25% from -0.50% to -0.25% in its July meeting. Amidst rampant inflation which hit 8.1% in May, the ECB has decided to intervene to bring inflation back towards 2%, their target over the medium term. However as monetary policy is a blunt instrument that mainly targets demand-side inflation whilst much of the inflationary pressures can be attributed to supply-side issues, ECB president Christine Lagarde has conceded that inflation would remain “undesirably elevated for some time.” As a result of this, the ECB has slashed its growth forecasts for the region, from 3.7% to 2.8% for the 2022 calendar year. Furthermore, the ECB has reaffirmed its stance to end the Asset Purchasing Program on July 1, further withdrawing support from a sputtering economy. However, in a rare unscheduled meeting on June 15, the ECB announced its intentions to devise a tool to help indebted countries by tilting the reinvestment of its maturing debt towards the heavily indebted countries in a bid to normalise the economic conditions across its member countries. As the economic outlook for the Eurozone and US deteriorate, the movement of the currency pair will likely be dictated by investors’ opinions surrounding the downside risks of the respective countries.
TECHNICAL ANALYSIS
Anton Ragusa
AUD/USD
The AUD/USD pair currently sits at a major high time frame support, located at the bottom of a range which has been respected since late 2020 and all throughout the Federal Reserve and RBA’s quantitative easing policies, as well as the recent quantitative tightening and rate hiking. The pair is likely to break below the bottom of the range support level if it cannot make a higher low when retesting the resistance level at 0.72. With the market structure looking extremely bearish for the AUD, we could see a retest of the support levels around 0.66, a level not seen since the COVID crash. This appears especially likely as the Federal Reserve maintains its extremely hawkish monetary policy that looks to almost completely reverse the USD devaluation caused by the expanding Fed balance sheet. If the AUD is going to recover from the current bearish structure then we could see a retest of the middle of the range at 0.745, or even potentially the range highs around 0.80, however this would require a significant catalyst such as the Federal Reserve reversing its strong hawkish stance or the RBA deciding to rate hike more aggressively. Overall we are likely to see lower prices for the AUD in the coming weeks.
EUR/USD
The Euro continues its abysmal performance against the US Dollar, nosediving to the bottom of the range, which has been respected since 2015. All outlooks for the Euro look extremely bearish, with the fundamentals looking irreversibly bearish, as inflation runs rampant and interest rates still in the negatives despite recent hiking. This sentiment seems to be consistent with traders as the Euro seems ready to break below the range low support, indicated by the consistent lower highs during the downtrend. With the clear skies below the key support at 1.04, the Euro could see levels left untouched since 2003. The only bullish case for Euro would be catalyzed by either the US Federal Reserve reversing its hawkish stance, or the ECB deciding to rate hike much more aggressively. In either situation we would likely see a retest of the resistance levels at 1.15 and 1.25 and then a lower time frame range situation. Overall the outlook for the Euro is tremendously bearish and there will likely be little relief for investors in the short term.