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Australian Dollar Fundamental Forecast: Bearish

Talking Points:

  • Australian Dollar may gain on local CPI report as local data is starting to outperform
  • However, appreciation may not last. US GDP and an ECB rate decision may hurt AUD
  • The risk of trade wars as the US could pursue auto tariffs makes for a bearish forecast

Have questions about the Australian Dollar outlook?Join a free Q&A webinar and have them answered!

Despite a solid local employment report, the Australian Dollar was heading for a weaker week against its US counterpart. The US Dollar was outperforming as Fed Chair Jerome Powell testified to lawmakers, offering more hawkish views on their outlook. Comments from Donald Trump expressing his disdain for higher US rates, while hurting the greenback to an extent, still saw AUD/USD lower for that day.

The following week offers a plethora of event risk for the Aussie Dollar and we shall begin with domestic ones. On Wednesday, Australia’s second quarter inflation report will cross the wires. CPI y/y is expected to increase to 2.2% while the trimmed mean measurement holds steady at 1.9%. The latter is a more underlying reading of inflation which the Reserve Bank of Australia closely follows.

Lately, Australian economic data has been tending to outperform relative to economists’ expectations. A similar outcome here could increase RBA rate hike bets. At the moment, overnight index swaps are pricing in a better-than-even chance of 55.1 percent that the central bank will raise rates in July 2019. Needless to say, an outcome that goes against the central bank’s projections for inflation would bode ill for AUD.

Outside of the country, an economic event that can offer US Dollar volatility is Friday’s local GDP report. The first estimate of US growth for the second quarter points to an annualized pace of 4.0%. This would mean the fastest pace of expansion since the third quarter of 2014. Similar with Australia, US data is also tending to outperform. Thus, the greenback may gain here at the expense of its Australian cousin and vice versa.

Aussie Dollar traders should also be wary of next week’s ECB monetary policy announcement. This is because back in June, the central bank offered a dovish view on raising rates in 2019 after it plans to finish its QE programme this December. The result was broad Euro weakness and US Dollar strength which saw AUD/USD put in its largest daily decline since February. More hesitation from the ECB to raise rates sooner may result in a similar reaction.

Finally, the sentiment-linked currency remains vulnerable to trade wars. On Friday July 20th, the US Commerce Department is supposed to finish its two-day hearing into whether or not auto imports pose as a national security threat. Signs that the world’s largest economy could pursue auto import tariffs against its allies, like it did with the metal tariffs, could dampen sentiment and send AUD lower.

BACKGROUND: A Brief History of Trade Wars, 1900-Present

On Saturday July 21st, G-20 finance ministers and central bankers will meet and trade wars will likely be brought up as a topic. Then next week on July 25th, European Commission President Jean-Claude Juncker and EU Trade Chief Cecilia Malmstrom will meet with Mr. Trump to talk about averting auto tariffs. These events seem likely to result in stock and FX market volatility.

With that in mind, combining the risks ahead creates for a bearish Australian Dollar fundamental trading outlook.

We just released our 3Q forecasts for equities and the US Dollar in the DailyFX Trading Guides page

Australian Dollar Trading Resources:

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter