The Australian dollar (AUD) finished the week on a lower note, after hitting a daily high of 0.6884, dropped on a risk-off impulse, as Wall Street ended the session with losses between 0.26% and 0.58%, while the Dow Jones was the outlier, finishing 0.39% above its opening price. At the time of writing, the AUD/USD exchanges hands at 0.6877. The pair had been on the rise for the past week, as investors were optimistic about the vaccine rollout, and the US stimulus package.
Global stocks finished on a lower note as investors increased their bets that the US Federal Reserve (Fed) will tighten policy above earlier expectations. Last week’s January inflation reports in the United States (US), namely the Consumer Price Index (CPI) and the Producer Price Index (PPI), were lower compared to December’s data but above estimates. In fact, the highlight of the week was PPI on a monthly basis, exceeding the consensus and the prior month’s figure, which justified Fed officials’ hawkish commentary during the week.
On Thursday, Cleveland and St. Louis Fed Presidents Loretta Mester and James Bullard commented that they’re seeing compelling evidence to raise rates by 50 bps in upcoming meetings. Today, Fed Governor Michell Bowman stated that the US central bank has not finished tightening monetary conditions and reiterated that “we haven’t beaten inflation.” Meanwhile, Richmond’s Fed President Thomas Barkin said that getting inflation back to the Fed’s 2% goal “will require more rate increases,” said reporters following an event in Rosslyn, Virginia. “How many of those I think we’ll have to see … what you see is progress, but slow progress, you don’t see victory.”
Elsewhere, in the Asian session, the Reserve Bank of Australia (RBA) Governor Philipe Lowe said that based on incoming data, the RBA board estimates that additional rate increases will be needed “over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.” Governor Lowe further added that “If we don’t get on top of inflation and bring it down in a timely way, the end result will be even higher interest rates and more unemployment in the future.”
Given the backdrop and worse than estimates Australian labor market date revealed on Wednesday, the US Dollar (USD) regained composure and weighed on the Australian dollar. The AUD/USD pair tumbled from around 0.6989 toward the week’s lows at 0.6811.
The economic calendar next week will feature a lot of important economic data from both Australia and the US. The Australian economic docket will feature Manufacturing, Services, and Composite PMIs, the Composite Leading Index, and the Wage Price Index. On the US front, the calendar will reveal Q4’s GDP estimates, Initial Jobless Claims, the Fed’s preferred inflation gauge, and the University of Michigan Consumer Sentiment final reading.
The AUD/USD pair is currently trading at 0.6877. To the upside, the pair has a strong resistance at 0.6950, followed by 0.7000. To the downside, the pair has a strong support at 0.6800 and 0.6750.
In conclusion, the Australian dollar finished the week with losses, as investors increased their bets that the US Federal Reserve will tighten policy above earlier expectations. The AUD/USD pair is eyeing the busy economic calendar in Australia and the US next week. The pair has a strong resistance at 0.6950, followed by 0.7000. To the downside, the pair has a strong support at 0.6800 and 0.6750.