Inflation data matter to AUD, USD, and EUR this week
Group Research - Econs, Philip Wee27 May 2024
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AUD/USD corrected lower by 1% to 0.6628 last week after rising in the previous four weeks. AUD hit the year’s low of 0.6363 on April 19 and rose with a narrowing in Australia’s bond yield differential against the US. The Fed was less dovish at its FOMC meeting on May 1, flagging that US sticky inflation would delay rate cuts and not lead to a rate hike. The Reserve Bank of Australia was more hawkish at its meeting on May 7, signalling no intentions to lower rates this year from its projection for inflation to return into the 2-3% target band only by the end of 2025 and the 2.5% mid-point in 2026. AUD/USD peaked at 0.6714 on May 16 after interest rate futures reduced this year’s rate cut bets to a single Fed cut in September and removed all RBA cuts. Australia’s jobless rate rose to 4.1% in April vs. the 3.9% consensus, with March revised to 3.9% from 3.8%. This week, US and Australian inflation data will decide if AUD/USD returns higher towards 0.67 or corrects lower below 0.66. On May 29, AUD will be vulnerable if Wednesday’s CPI inflation falls below the 3.4% YoY consensus in April from 3.5% in March, given the RBA’s projection for inflation to rise to 3.8% in June. However, softer US PCE deflators could soften the USD and support the AUD this Friday.

The USD Index (DXY) will be wary of softer US data after last week’s 0.3% recovery to 104.72. US financial markets will be closed for the US Memorial Day holiday today. Tomorrow, delayed Fed cut expectations could see the US Conference Board’s consumer confidence index declining farther below 100 in May after its drop to 97 in April. On May 30, the US Bureau of Economic Analysis will likely lower the annualized GDP growth for 1Q24 from its advance estimate of 1.6% QoQ saar. All eyes will be on Friday’s PCE deflators. Given that CPI and core inflation fell to 0.3% MoM in April from 0.4% in March, the PCE and core deflators should also slow to 0.2% from 0.3%. If so, DXY should eye lower levels around 104-104.3.

EUR/USD depreciated by 0.2% to 1.0847 last week, its first decline in six weeks. On May 27, European Central Bank Chief Economist Philip Lane should be confident about the ECB lowering rates before the Fed on June 6. In April, EU and CPI and core inflation were 2.4% YoY and 2.7%, closer to the official 2% target, compared to their US counterparts at 3.4% and 3.6%, respectively. On May 31, the EU CPI estimate should decrease to 0.2% MoM in May from 0.6% MoM in April but increase to 2.5% YoY from 2.4% YoY. Hence, Lane will unlikely pre-commit to more rate cuts after June, opting for a data-dependent and meeting-by-meeting approach. Thus, EUR/USD could find support around 1.08, near its 100-day moving average.

Quote of the day
“Patience is the art of hoping.”
     Luc de Clapiers

27 May in history
The largest flag ever made at 5 tons with 44 miles of was unveiled in Romania in 2013.


Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]


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