RBA slightly lowers growth forecasts. Flags higher exchange rate as a concern

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The Reserve Bank of Australia released its quarterly monetary policy statement earlier today. According to the report, the central bank slightly lowered its growth forecasts for 2017 and 2018. The Australian economy is now expected to rise 2% – 3% for the mentioned periods.

This was slightly lower than the May forecasts which saw the central bank expecting growth to rise 2.5% – 3.5%. The central bank also noted that the exchange rate could be a concern, noting that “Further exchange rate appreciation would tend to generate a slower pickup in economic activity and inflation than currently forecast.”

The RBA was seen ratcheting up the pressure on the AUD. It had previously cited concerns of an appreciating Australian dollar which could keep both growth and inflation subdued. The RBA’s monetary policy statement is released on a quarterly basis and gives the central bank projections.

On inflation, the RBA’s forecasts showed that inflation could return to 2.5% – 3.5% by June 2018. This comes after the recent inflation data showed consumer prices falling below the RBA’s 2% – 3% inflation target band.

An overshoot of inflation by June 2018 could potentially signal a tightening cycle from the RBA. Overall, the central bank seemed optimistic as it said that higher iron ore prices, unemployment rate staying below 5.5% as evidence of positive outlook in growth.

RBA keeps rates steady

Earlier this week, the Reserve Bank of Australia kept the key interest rates unchanged at 1.50%. The interest rate has been steady since August 2016. In the accompanying monetary policy statement, the RBA shed light on its view on the exchange rate.

The statement from the RBA said that the recent appreciation in the exchange rate for the AUD was expected to keep price pressures subdued.

The RBA Governor, Philip Lowe also said that the central bank was “weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

Despite the concerns, the lack of jawboning of the AUD saw the currency trading flat after the RBA’s decision and the statement. The main take away from the RBA meeting was that the rising exchange rate could keep growth subdued.

While the AUD has managed to dodge the bullet this time, there is a risk that the currency could come under central bank pressure if the current uptrend continues.

Australia retail sales rises 0.3% in June

The retail sales report was released earlier today as well. Data from the Australian Bureau of Statistics (ABS) showed that retail sales rose 0.3% on a seasonally adjusted basis in the month of June.

Australia Retail sales (m/m): 0.3% (June 2017)
Australia Retail sales (m/m): 0.3% (June 2017)

This was higher than the estimates of a 0.2% increase but marks a slower pace of acceleration, after retail sales rose 0.6% in the month before.

Still, there were a lot of positives. Retail sales data showed that the value of nominal sales, at $26.15 billion was the highest on record as it jumped $490 million from the previous three months. This put the annual retail sales at 3.8% which marked the fastest pace of increase since April 2016.

AUDUSD – Technical Outlook

After rallying to a fresh two-year high, the Australian dollar was seen trading subdued this week. Price action, for the most part, was confined to the previous week’s range high and low of 0.8065 and 0.7878. If AUDUSD closes within this range this week, we could anticipate a downside breakout in the AUDUSD.

AUDUSD - Weekly Outlook
AUDUSD – Weekly Outlook

Technical support is seen at 0.7730 which is quite likely to be tested. However, this strong level, which previously served as resistance could hold the declines. Thus, new buyers could be seen entering the market at this level.

The breakout from 0.7730 resistance came with an ascending triangle pattern. The upside target or the minimum objective is at 0.8078. However, the reversal just a few pips below this level could suggest the potential for a higher close.

The retest back to 0.7730 thus coincides with a breakout from this ascending triangle pattern with further upside likely in store.

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