The Australian Dollar shed 1.86% over the past week to trade at 0.6723 on the back of US inflation data and some dovish commentary by the RBA. For the month of August, US headline inflation rose 0.1% month-on-month, above consensus estimates which had forecasted a 0.1% fall in overall inflation. As a result, investors have now fully priced in a 75 basis point hike to the Fed Funds Rate in the September meeting and expect the Fed to maintain its strong hawkish stance in the near term. Moreover, the RBA has stated that it is committed to returning inflation to the target over time without damaging the economy in the near term. The RBA’s dovish comments in conjunction with the Fed’s hawkish stance suggests to investors that the interest rate differential between Australia and the US will continue to widen, which will put further pressure on the AUD.
The Euro fell 0.46% over the week to trade slightly above parity at 1.0018 amidst fears of stagflation in the EU. European Central Bank (ECB) policymakers have admitted that the bank had underestimated the pace of inflation caused by recent supply side shocks, and by taking a relatively dovish stance, the EU is now experiencing soaring inflation and unemployment. Moreover, the deepening energy crisis in Europe ahead of the winter season will likely exacerbate electricity shortages and further add to the spiralling inflation figure. As such, investors are bracing for rapid monetary tightening in the short term, which will push the Euro higher.
The Australian Dollar showed weakness in the past week, falling almost 2% on the back of a more hawkish Federal Reserve. It is currently trading near the long-term horizontal support level at 0.668 within a descending triangle, meaning the Aussie Dollar is likely to experience a short term bounce that retests the green trendline. A RSI of 40 further supports this hypothesis, as it suggests that the AUD is nearing oversold territory and is primed for a bounce.
EUR/USD slid 0.5% last week to trade at 1.003 as negative sentiment continued to push the Euro lower. It is trading at the upper trendline of a downward channel which the Euro has respected since the start of 2022. Without any serious fundamental tailwinds for the Euro, EUR/USD will likely continue to make lower highs and lower lows and trade below parity for the foreseeable future.