AUD/USD
After surging to four-month high of 0.7441 in the early part of last week, AUD/USD spent the rest of the week easing lower and consolidating those gains.
Helping to lift AUD/USD in the early part of the week were record highs in the prices of a number of base metals prices (of which Australia is a larger exporter), most notably the price of nickel.
The 100-day moving average of 0.7228 now presents itself as a technical level of support for AUD/USD to further consolidate its recent appreciation.
Last week, RBA governor Phil Lowe provided an updated view on Australia’s inflation outlook, saying “the sanctions against Russia have created a new supply shock” and the risk is inflation is higher and more persistent.
The RBA has been waiting “patiently” to achieve its objective of full employment (that is, an unemployment rate of below 4.0% and below its current rate of 4.2%) but the RBA Governor stated the RBA cannot achieve that objective if inflation rises and is higher than expected. In summary, “given the (updated) outlook, … it is plausible that the cash rate will be increased later this year.”
In summary, the RBA governor took a step closer to lifting interest rates in Australia this year. The interest rate market is fully pricing 7th June as the date when the RBA will lift interest rates from 0.1% to 0.25%.
This week, Australian employment growth, and an update on Australia’s unemployment rate (on Wednesday) will be the main domestic mover for AUD/USD. Otherwise, offshore factors, notably developments in the conflict between the Ukraine and Russia will again be the main driver of AUD/USD this week.
AUD/EUR
AUD/EUR is likely to spend a period of time consolidating the unusually strong appreciation it has undertaken since early February. Putting
the extent of the recent rise in AUD/EUR into perspective, AUD/EUR has recently lifted one-standard deviation based on its average level since 2010. This is a highly unusual lift in AUD/EUR in such a short period of time.
It is likely, on the basis of consolidating recent moves only, that AUD/EUR eases back to between 0.6600 and 0.6520. It is helpful to keep in mind that this range is still well-above the 200-day moving average of 0.6328 and is long-term average of 0.6392.
However, the on-going war in the Ukraine will keep EUR/USD heavy and the elevation in commodity prices will keep AUD/USD somewhat supported. Developments in the Ukraine war will continue to be the primary driver of AUD/EUR, which means AUD/EUR could remain elevated.
Last week, the European Union (EU) stated that the ECB could sell bonds to fund increased energy costs that are dampening Eurozone economic growth. This policy response was enough to generate some strength in EUR and help AUD/EUR ease from its highs.
At last week’s monetary policy meeting, the ECB expressed concern over inflation, and indicated the war in Ukraine would not stop it raising interest rates. The ECB sped up its tapering of asset purchases saying it will complete the asset purchases (quantitative easing) in Q3 of this year. This effectively brings forward the timing of when the ECB will most likely lift interest rates because the ECB have said they want to conclude asset purchases before raising official interest rates “some time after” that. The interest rate market is now pricing a lift in interest rates by the ECB in October this year.
The ECB also updated their economic forecasts which led to the above forward guidance on monetary policy. Inflation forecasts are higher.
Developments in the conflict between the Ukraine and Russia will be the main driver of AUD/EUR this week. Economic data out of the Eurozone this week include the final estimate of Eurozone February CPI inflation. There is unlikely to be much change from the initial estimate of 5.1% (YoY).
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