In mid-April, the AUD/USD pair broke to new 10-month highs close to 0.7850 amidst increased volatility. This was mainly due to weakness in the US dollar, indicating the declining prospect of a rate hike in June by the US Fed. But the unexpected slowdown in Australia’s inflation in the first quarter has resulted in the pair to drive back below 0.74. Following the inflation data, the Australian central bank lowered interest rates to 1.75% from 2% and also cut its inflation outlook.
However, the Australian economy continues to be quite stable in spite of the weak inflation outlook. In April, retail sales recovered, while the jobless rate rebounded surprisingly to 5.7%. Even if there is a possibility of the Australian central bank to further ease policy in 2016 and if the US Fed keeps the interest rate on hold in the months to come, the “downside in AUD/USD should be limited given the potential for USD weakness”, noted Lloyds Bank in a research report.
“We anticipate the pair trading in a relatively narrow range, edging towards 0.80 by end-2017”, added Lloyds Bank.
