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Australian Dollar could go Bullish Due to Inflation Data

In: Finance, Forex

The Australian dollar had a rebound from four weeks of losses as inflation data is due to provide clues on the pace of monetary policy tightening.

The Aussie has dropped about 2.7% against the dollar in the past two weeks amid growing expectations of aggressive rate hikes by the Federal Reserve.

Economists expect data on Wednesday to show the annual trimmed mean gauge of consumer prices rose to 3.4% in the first quarter, higher than the central bank’s 2% to 3% inflation target.

Traders may pivot back toward the Aussie with as more clarity comes on when the Reserve Bank of Australia will also start to raise rates. The RBA said last week that accelerating core inflation and a pickup in wages growth have brought forward the likely timing of a hike, with overnight-indexed swaps pricing in an increase of almost 50 basis points by June.

“As uncertainty around the Federal Reserve tightening cycle falls and the Reserve Bank of Australia starts to catch up, the Aussie will start to recover,” said Ashish Agrawal, head of FX & EM macro strategy research at Barclays Bank Plc. He expects the currency to end the year at 76 U.S. cents, with potential for it to hit 80 cents in 2023.

The Australian dollar is projected to reach 76 U.S. cents by the fourth quarter of this year, according to median estimates compiled. It traded around 71.35 cents on Monday, having fallen 0.1% this year, the smallest decline against the greenback among Group-of-10 currencies.

Earlier this month, Governor Philip Lowe signaled inflation will be a key reading, suggesting the central bank’s June meeting is now in play.

Bill Evans, an influential economist at Westpac Banking Corp., said last week he expects the RBA to adopt a clear tightening bias at its May meeting before making a 40 basis points hike in June. The cash rate is currently 0.1% and most economists expect the first hike in June will be 15 basis points, taking the benchmark to 0.25%.    

Evans sees the currency trading between 73 to 77 cents, ending the year at around 75 cents, with support from strong commodity prices.

The risk of more lockdowns in China could hurt Australia. A slower growth backdrop there would reduce demand for Australian commodity exports, capping gains in the currency.

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