Australian Dollar Takes Traders for a Wild Ride

04/17/2023

1 minute read

2023.04.17 05:58

MarketPulse

US retail sales decelerate sharply in May
US bank earnings were solid
Markets have priced a May rate hike at 80%
steady after swings of over 1% late last week

The Australian dollar has steadied on Monday, trading just above the 0.67 level. We could see further movement from the Aussie early on Tuesday, as China releases GDP.

Aussie sinks after strong US earnings, Fed speak

The markets received another clear sign on Friday that the US economy is slowing, after a disappointing March retail sales report. Headline retail sales fell by 1% and the core rate by 0.8%, worse than expected and marking a second straight decline for both.

A soft US retail sales report is usually a recipe for US dollar weakness, but that wasn’t the case on Friday, as AUD/USD fell by 1%. The US dollar received a boost from strong earnings results, higher inflation expectations and some hawkish Fed speak.

Bank earnings impressed on Friday, with strong results from JP Morgan, Citigroup (NYSE:) and Wells Fargo (NYSE:). This indicates that the bank crisis has been contained for now, although further contagion cannot be ruled out.

On the inflation front, UoM inflation expectations for 12 months jumped 4.6% in April, up sharply from 3.6% in March. Consumer confidence has been on the low side as inflation remains high, and the weak retail sales report was clear proof that consumers are spending less due to high inflation and rising rates.

Fed member Waller had a hawkish message on Friday, saying that the Fed would need to continue raising rates because inflation is “far above target” and the labor market remains “quite tight”. Waller warned that the Fed would have to keep rates at a high level for an extended period and for longer than the markets expected. Fed member Bostic said he supported one or two more 25-bp hikes to end the current tightening cycle. The likelihood of a 25-bp increase in May has jumped to 80%, up from 68% prior to the retail sales release.

AUD/USD Daily Chart