The Australian dollar is in positive territory on Tuesday. AUD/USD is trading at 0.6944 in European trade, up 0.28% on the day.
Retail sales expected to soften
Australia releases retail sales for May on Wednesday. Retail sales is the primary gauge of consumer spending, and the markets are braced for a weak reading of 0.3%, following a 0.9% gain in April. Consumers are holding tightly onto their purse strings, as interest rates are on the rise and the cost-of-living crisis is intensifying. A deceleration in retail sales could cause slowdown fears and push the Australian dollar lower.
The markets are already nervous about an economic slowdown, with the RBA in the midst of its rate-tightening cycle. The central bank surprised the markets with a super-size 0.50% hike earlier in June, and the RBA could deliver another 0.50% increase at next week’s meeting, or stick with a modest 0.25% rise. The cash rate is still relatively low at 0.85%, and the Bank will have to raise rates aggressively in order to curb soaring inflation.
On Friday, Governor Lowe stated that there were no plans to raise rates by a massive 0.75% hike at the upcoming meeting. This of course does not rule out the possibility of such a move at later meetings. Lowe suggested last week that wage growth should be about 3.5%, half of the 7% inflation rate that the RBA is projecting by year’s end. This would essentially mean a pay cut for workers and could be the recipe for labour unrest if workers demand higher wages to compensate for soaring inflation. Wage growth has been very modest and is not a cause of the jump in inflation; rather, the war in Ukraine and supply chain disruptions, notably in China, have been the primary drivers of inflation.
- AUD/USD is testing resistance at 0.6936, followed by resistance at 0.7004
- There is support at 0.6877 and 0.6809