The Australian dollar is in calm waters this week, as AUD/USD trades quietly just below the 0.73 level.

GDP slows to 0.8%

Australia’s Q1 GDP slowed to 0.8% QoQ, after a massive 3.6% QoQ gain in Q4 of 2021. Investors were braced for a softer release after the impressive Q4 surge, and the Q1 reading actually outperformed, beating the estimate of 0.5%. This has resulted in a muted response to GDP, with the Aussie edging slightly higher.

The whipsaw movement in GDP makes it difficult to predict the underlying strength of the economy. As far as the RBA is concerned, the respectable growth in Q1, which translates into 3.2% annualized growth, doesn’t interfere with its rate-tightening plans. Monetary policy has not focused all that much on GDP, with the RBA concentrating on the labour market, wage growth and inflation. The RBA holds its meeting next week, and is likely to tighten by another 25-bps, which would bring the cash rate to a (still low) 0.60%.

Australia’s current account contracted to AUD 7.5 billion in the first quarter, down sharply from AUD 13.2 billion in Q4 of 2021. The decline was a strong increase in imports, which outstripped exports. This is consistent with strong retail sales, as consumers continue to spend in the follow-up to the removal of Covid restrictions.

In the US, the Fed commenced quantitative tightening this week and the Fed continues to send out hawkish messages. Fed Governor Christopher Waller urged the Fed to continue its rate hikes and said that he supported raising rates above the “neutral level”, which is not supportive or restrictive for growth. The Fed estimates the neutral level around 2.5%, which leaves plenty of room for further hikes. Fed Chair Powell has signalled that the Fed will deliver 50-bps hikes in June and July, followed by a pause in September.

AUD/USD Technical

• 0.7207 is under pressure in resistance. Above, there is resistance at 0.7252
• There is support at 0.7121 and 0.7076

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