AUD/USD rally takes pause ahead of massive week

Daily currency update

The Australian dollar traded below US$0.71 Monday as investors took pause ahead of a massive week filled with key macroeconomic data points, central bank policy meetings and key corporate earnings reports. Having surged above US$0.71 Friday, the AUD met resistance on moves approaching the 6-month August high, edging off US$0.7140 and slipping below US$0.71, trading back toward US$0.7075. The risk narrative shifted Monday as investors appear reluctant in extending AUD gains ahead of a slew of critical data points and monetary policy updates. While Chinese PMIs and US employment costs dominate today’s docket, the Federal Open Market Committee’s monetary policy update, rate statement and ECB policy review dominate the weekly ticket and will be critical in shaping near-term direction. Inflation pressures appear to have peaked in the US while a surge in Spanish CPI raises questions about European price pressures and calls for policymakers to temper the pace of rate hikes in a bid to minimise any economic downturn and stave off recession. The promise of looser monetary policy in the US has helped fuel risk demand and prompted a correction in US dollar strength through the first month of 2023. A dovish Fed outlook and policy response could be the catalyst that sees the AUD surge through resistance and consolidate a break above US$0.70/71.

Key movers

Price action across major currencies was largely lacklustre through Monday as markets appear content in squaring positions ahead of a massive week filled with key risk events. Having enjoyed a resurgence through January risk appetite soured slightly amid fresh inflation concerns and an uptick in the global rates backdrop. The US dollar found support amid a weaker risk profile while the Japanese yen faltered as global rates rose. While the yen found support early on comments from potential future Bank of Japan Governor Yuri Okina, wherein it was suggested the BoJ and government need to align and revise key policy objectives to tame inflation. With Okina tipped to replace the outgoing Kuroda, the comments drove expectations for a shift in policy and move away from yield curve controls, prompting a knee-jerk surge in JPY demand before the higher rates backdrop forced investors to give up gains. Global rates pushed higher following a surprise uptick in Spanish CPI data. Annual price pressures rose by 5.8% in January, well above the 5.5% seen in December and way off estimates for a contraction to 4.8%. Spain is the first euro area country to release CPI data and suggests an upside surprise across the region may be coming. An uptick in price pressures flies in the face of the narrative that inflation is easing and would force a rebalancing in euro area rate expectations. With markets pricing in a 50-basis point hike this week, elevated inflation pressures will likely force the ECB to maintain the pace of rate hikes and move away from calls to temper the pace of future rate adjustments.

Expected ranges

• AUD/USD: 0.6950 – 0.7140 ▼
• AUD/EUR: 0.6450 – 0.6550 ▼
• GBP/AUD: 1.7280 – 1.7620 ▲
• AUD/NZD: 1.0880 – 1.0980 ▼
• AUD/CAD: 0.9380 – 0.9480 ▼