Australian GDP Preview: Return to growth in Q3, enough for AUD bulls?

• Australian GDP to rebound 2.5% QoQ in the third quarter.
• The RBA kept monetary policy settings steady in December.
• AUD/USD looks north but its fate hinges on Lowe, risk tone.

The Australian economy is seen returning to expansion in the third quarter, having recorded -7% QoQ in the three months to June, the deepest contraction since World War 2 amid the coronavirus pandemic induced partial lockdowns.

The government has been relatively successful in controlling the second wave of coronavirus, which is likely to be reflected in the third quarter (Q3) GDP report, slated for release on Wednesday at 0030 GMT.

The Australian economy is expected to rebound by 2.5% QoQ in Q3. On an annualized basis, the GDP is likely to see a 4.5.% contraction vs. -6.3% recorded in the second quarter.

Strong Australian economic data suggest a swift turnaround

The economy is likely to recuperate from an economic shock, with the macro indicators having emerged quite upbeat despite the impact of extended lockdowns in Victoria.

Unexpectedly strong employment and consumer spending data have collaborated to the likely upturn in the economy. Although doubts remain over the strength of the economic recovery amid a slowdown in Australian wage growth and a bigger-than-expected fall in the private capital expenditure for the third quarter.

Going forward, the risks remain skewed to the upside for the OZ economy, as the activity in Victoria resumes and as internal borders are re-opened. Further, the strong economic rebound seen in China, Australia’s biggest trading partner, also adds credence to the upbeat outlook on the economy in the coming quarters. The activity in China's factory sector accelerated at the fastest pace in a decade in November, the latest PMI data released by Caixin showed on Tuesday.

RBA keeps policy steady, ready to do more

Acknowledging improvement in the economic data and positive coronavirus vaccine developments, the Reserve Bank of Australia (RBA) left its monetary policy settings unchanged at its December meeting, keeping the Official Cash Rate (OCR) steady at a record low of 0.10%.

“The board is prepared to do more if necessary,” Governor Philip Lowe reiterated in a post-meeting statement, adding that the “recovery is still expected to be uneven and drawn out and it remains dependent on significant policy support.”

The wait-and-see stance by the RBA, with no mention about negative interest rates, hints at the central bank’s optimism on the economic recovery.

AUD/USD Technical outlook

The AUD/USD pair is consolidating its surge to multi-month highs of 0.7437, underpinned by vaccine optimism-led higher demand for riskier assets. The further upside attempts in the aussie likely remain capped amid the latest decline in gold prices.

Ahead of the Q3 GDP release, the RBA Governor Philip Lowe is scheduled to speak at 00 GMT. His speech will be closely eyed, especially after he said last month that sub-zero rates might be implemented if other central banks made such a move. Therefore, AUD/USD’s reaction to the GDP release could be influenced by Lowe’s comments and the prevalent market mood.

From a technical perspective, the four-hour chart shows that the path of least resistance is to the upside for AUD/USD. However, the major faces two critical hurdles before it resumes its journey towards the 0.7500 level. Acceptance above the horizontal 21-simple moving average (SMA) at 0.7372 is critical to challenging the multi-month tops above 0.7400.

The Relative Strength Index (RSI) points north while above the midline, allowing more room to the upside. Alternatively, the 50-SMA at 0.7341 is strong support, below which the 100-SMA at 0.7313 could be challenged on the data disappointment.