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Title: Australian Dollar Q3 2022 Forecast: Fed’s Lost Credibility is Noted by RBA

Jul 08, 2022 01:55AM ET

By: AnalysisWatch

The Australian dollar hit a two-year low against the U.S. dollar in May as central banks around the world jockeyed for position in the fight against inflation.

The monetary tightening cycle turned dramatically in the second quarter toward a much more aggressive stance, including from the Reserve Bank of Australia (RBA) and the Federal Reserve. Notable exceptions to the tightening monetary policy conditions include the Bank of Japan (BoJ) and the People's Bank of China (PBOC).

At the start of the third quarter, the latest consumer price index was 8.6% year-over-year for the U.S. and 5.1% for Australia.

AUD/USD remains vulnerable to fluctuations in interest rate perceptions. RBA Governor Philip Lowe recently stated that Australians should brace for a possible 2.5% policy rate later this year when inflation is expected to reach 7%. With the policy rate at 0.85%, this means at least another 50 basis point hike.

The consumer price index is a key driver for any increase or decrease in the RBA's policy rate. The consumer price index for the second quarter, which will be released on July 27, is shaping up to be a crucial data point. Dr. Lowe has made it very clear in his recent public remarks that the rate of change in inflation will be central to policy making.

The importance of these CPI numbers for future rate hikes cannot be overstated. The implications for AUD/USD will come from this data point. The Fed saw that inflation in the US was accelerating at an alarming rate by the end of 2021 and acted too slowly. Inflation in the US has never fallen by 2% or more without a recession.

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