The Australian Dollar closed the week slightly higher, up 0.28% to close a fraction below 70 US cents. In line with market expectations, the Federal Reserve raised the Federal Funds Rate by 75 basis points on Thursday to bring the target range to 2.25%-2.50%. This was accompanied by a dovish tilt within Federal Reserve Chairman Jerome Powell’s speech, in which he concluded that forward guidance regarding monetary policy would no longer be provided and would be adjusted depending on the incoming economic data. Also on Thursday, Australia released its inflation figures for the June quarter with a headline figure of 6.1%, the fastest rise in prices since the GST was introduced in 2000. Despite this, this figure was below the market consensus of 6.2% and Treasurer Jim Chalmer’s update in Parliament, predicting inflation to peak at 7.75% in the December quarter has eased fears of the prices following the paths of our US counterpart. Therefore, it will be interesting to see the RBA’s move next week with monetary policy to see whether a growing interest differential between Australia and the US will put further downward pressure on the Australian Dollar.
The Euro closed the week slightly higher against the greenback, at $1.022 after opening the week down 0.1%. The US entered a technical recession on Thursday with Q2 GDP data showing a 0.9% contraction in the June quarter following a 1.6% decline in the first calendar quarter of 2022. However, the National Bureau of Economic Research is not expected to call a recession immediately due to the strong labour market. In Europe, the overall economic sentiment has fallen sharply alongside a fall in both consumer confidence and industrial sentiment. This comes as Russia’s Gazprom announced that it will cut its Nord Stream 1 pipeline by a further 20% from 40% to 20% of normal capacity, causing a 30% spike in gas prices over the next 2 days following the news release. In Germany, benchmark power prices rose to 370 Euros per MWh, a figure that seldom crossed 60 in normal conditions. This has led to an emergency EU meeting in which all the energy ministers agreed to a proposal to decrease gas usage by 15% with some industries exempt, prompting fears of continued economic disruption and a recession in early 2023. Therefore, despite economic headwinds for both regions ahead, the uncertainty in energy supply in Europe could see the Euro retest parity in the upcoming weeks.
The Australian Dollar has rebounded from its downtrend, with the price now settling in at a previous support level turned major resistance of 70 cents. It is unlikely that the AUD can overturn this level on current economic conditions, as the US Dollar continues to dominate on most currency pairs due to the overall risk off sentiment. Therefore, the Australian Dollar will most likely fall to the previously broken support level of 0.685 cents, where it could see a solid reaction and show a solid change in market structure by trending upwards. Otherwise, if the US dollar maintains its strength then we will see a revisit of the demand zone at around 0.675 cents. Either way it is likely the AUD will fall before a sizeable move to the upside eventuates.
EUR/USD has not wavered from its multi-year downtrend against the US dollar, but has found a strong support level at the key $1 area for the first time since early 2003. The reaction at this key support level was lackluster, failing to even retest the previous support turned resistance at $1.03. Therefore, the best case scenario for the Euro involves it holding the range between 1-1.02 US dollars in the short term. Possibly with a drastic change in sentiment or monetary policy by either central bank, EUR/USD could break out from the top of this range at 1.025 and retest resistance levels above at $1.036 and $1.077. However, it is most likely that the Euro ranges in the current zone before breaking down further upon the release of more bearish news out of Europe.