The Australian dollar has started the week in negative territory, after a brief rally late last week. In the European session, AUD/USD is trading at 0.6796, down 0.82%.

Can Australia avoid a recession?

The RBA is playing catch-up with the inflation curve, but the central bank can’t be faulted for being aggressive. Last week, the RBA raised rates by 0.50% for a second straight month, bringing the cash rate to 1.35%. That won’t be sufficient to rein inflation, which hit 5.1% in the first quarter and could top 7%, according to the RBA. The cash rate will almost certainly rise above 2% this year and could reach as high as 2.5% by mid-2023. Lowe has admitted that there is a “narrow path” between tightening enough to curb inflation or being too aggressive and causing a recession, but it seems clear that the RBA will choose a recession over rampant inflation.

Governor Lowe has predictably downplayed concerns about a recession, and one could make the argument that the economy is resilient enough to withstand a sharp increase in rates. Employment is at a low rate of 3.9%, job vacancies are at record highs and consumer demand remains robust.

The weak link, however, could be the housing sector, as mortgage costs keep rising, which will likely dampen household spending in the coming months. If first-time buyers decide to sit on the fence, housing prices could take a bath, which would be bad news for the economy. Consumer confidence has been waning, and Tuesday’s Westpac Consumer Confidence index for July could bring more bad news. The index has been mired in negative territory since November 2021 and posted a sharp 4.5% decline in June. We’ll also get a look on Tuesday at NAB Business Confidence for June, which slowed to 6 in May, down from 10 previously. If the confidence indicators underperform, I wouldn’t be surprised to see the Australian dollar respond with losses.

AUD/USD Technical

• AUD/USD is putting pressure on support at 0.6782, followed by support at 0.6706.
• There is resistance at 0.6839 and 0.6915

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