Fundamental Australian Dollar Forecast: Bearish

Official Australian Consumer Price Index figures are coming up

They’re forecast to show an uptick, but not much of one

Trade talks might provide wildcard support

Find out what retail foreign exchange traders make of the Australian Dollar’s prospects right now, in real time, at the DailyFX Sentiment Page

The Australian Dollar’s rise against its US counterpart came to a sharp halt last week, leaving the overall long-term downtrend stull very much in play.

The Aussie had been supported since late June by the markets’ not-so-gradual shift towards pricing in lower US interest rates. It’s highly likely that the persistent strength of iron-ore prices this year has also helped the bulls’ cause.

Iron ore is a key Australian export earner, and of course foreign buyers need Aussie Dollars to pay for it. However, in the current environment even mighty iron ore can never really be more than the supporting actor to monetary policy’s star billing, and it looks as though the star is starting to reassert itself on center stage.

Reserve Bank of Australia Governor Philip Lowe gave a speech last week in which he emphasized that record-low Australian borrowing costs could yet go lower still after back-to-back reductions in June and July. AUDUSD’s swoon after this was ostensibly puzzling. All Lowe did after all was confirm market pricing. Futures players were already betting on at least one further quarter-point fall in the Official Cash Rate.

However, it may well that some investors thought the central bank might be inclined to wait and see what effect action already undertaken has had before adding to it. It seems that that, at least, may not quite be so.

The coming week will offer another important milestone. Official Australian inflation numbers for the second quarter are due on Wednesday.

Consumer prices are forecast to have risen by an annualized 1.5%. That would be an acceleration from the first-quarter’s 1.3%, but still far below the lower bound of the RBA’s 2-3% target. Prints in that range have been elusive since 2014.

It’s very hard to see as-forecast data doing anything other than weigh on the Aussie, confirming as it would that ultra-low interest rates aren’t going anywhere.

However, Chinese and US negotiators are reportedly girding themselves for yet another round of trade talks in Beijing. It’s fair to say that market expectations of this are not high, but experience teaches that headlines supporting risk appetite and, thereby, the Australian Dollar can’t be ruled out.

Still, that’s a real imponderable and, on available evidence, the Aussie looks to be back under pressure. So it’s a bearish call this week.

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--- Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!