FX.co ★ AUD/USD: RBA's minutes and US dollar's weakness

The minutes of the Reserve Bank of Australia's last meeting, which took place on May 4, was published during the Asian session on Tuesday. The document was predictable, so the AUD/USD pair showed an upward trend, testing the level of 0.78. The US dollar was the main growth impulse: the US dollar index updated almost three-month low, reflecting weak demand. This fact allowed the buyers of the Australian dollar to ignore the dovish rhetoric of the RBA minutes, although it is quite average.

The US dollar is depreciating for several interrelated reasons. The starting point was the inflation release, which initially supported the national currency, but then dragged it down to new price lows. Fed officials, as well as some congressional politicians, reacted to this publication in a quite strange way, leveling the "hawkish" expectations of dollar bulls. The Fed representatives did not share investors' optimism about the future prospects for rising American inflation, pointing to last year's low base, the slowdown in the labor market and the failure of retail sales data. Long before the important release, Jerome Powell warned that the regulator would ignore the periodic inflationary growth that is achieved during periods of global economic restart. A similar position was voiced by his colleagues, assuring investors that the short-term growth of inflation indicators (and the vast majority of Fed members are confident that we are talking about short-term growth) is not a reason to revise the conditions of monetary policy. Several factors such as weak Nonfarm data, disappointing US retail sales, and a decline in industrial production, confirmed the validity of the Fed's "dovish" position.

In other words, the Fed remained true to itself: it ruled out the option of an early curtailment of QE and skeptically assessed the prospects for further growth of key economic indicators. According to the Fed representatives, "the episodic facts of a one-time price increase cannot be interpreted as a steady increase in annual comparison." They said that "such impulsive dynamics will not provoke sustained high inflation."

The resonant inflationary release should also be viewed through the prism of the prospects for the adoption of a large-scale infrastructure plan, which was initiated by the US President at the end of March. Joe Biden continues to seek bipartisan support for his initiative. According to unofficial data, he set a "deadline" for negotiations with the Republicans at the end of this month. But apparently, the parties will find a compromise solution, especially since the new economic plan involves raising taxes. Experts believe that the White House will focus on negotiations with the Democrats soon, offering as a compromise the option of raising the corporate tax rate not to 28%, but to 24-25%.

However, the US media reported that some Democratic congressmen began to discuss the opposite after the publication of data on the growth of US inflation. We are talking about the risks of "uncontrolled inflation". Such arguments have been exaggerated in the American press for quite a long time, especially after the publication of the Harvard Kennedy School Professor Larry Summers, who previously served as the US Secretary of the Treasury. In his article, he warned about the risks that could entail the already adopted "American Rescue Plan" and the new infrastructure plan. According to Summers, macroeconomic stimulus on this scale will create inflationary pressures that have not been seen in decades. And if such statements are rejected by the Fed representatives in the context of changing the parameters of monetary policy, then in the context of the adoption of a new 2-trillion economic plan, these warnings sound different. According to some experts interviewed by Reuters, Biden's initiative can pass the House of Representatives, but not pass the Senate, where the Democrats do not have "spare" votes.

Thus, the strong inflation release led to the opposite effect: the US dollar was under pressure not only from the Fed, but also from political factors that determine the fate of Joe Biden's large-scale infrastructure plan.

This fact allowed AUD/USD buyers to come close to the borders of the 78th mark. Traders ignored the predictable rhetoric of the minutes of the last RBA meeting, since the key decisions will be made in the middle of the summer.

As a result, the Central Bank confirmed once again that it does not plan to raise the rate until the actual inflation is settled on a stable basis in the target range of 2-3%. At the same time, they immediately outlined the time targets, stating that inflation indicators will be lower than the target values in the coming years. But as for QE, the regulator is intrigued. In an accompanying statement, the RBA indicated that the Central Bank will consider further bond purchases in July after the completion of the second program of $ 100 billion. In addition, the Reserve Bank will consider the fate of the target level of three-year bond yields at the same month. The regulator admitted that it is likely that assets "with a different maturity than April 2024" will be selected. This disposition allows AUD/USD traders to follow the US dollar, and to be more precise, to take advantage of its weakness.

Currently, the Australian dollar is testing the resistance level of 0.7800 (Tenkan-sen line on the daily time frame). After its breakdown, it is possible to consider longs with the main target of 0.7850 (upper line of the Bollinger Bands indicator on the same time frame). This is a fairly strong level of resistance, which was too strong for the Australian dollar. In fact, AUD/USD buyers tested this target several times, starting in February. Therefore, it is too early to talk about higher values, even amid weak positions of the US dollar.