The AUD/USD may experience further downside as investors lose confidence in the Reserve Bank of Australia’s (RBA) ability to control stubborn inflation. While the RBA has acknowledged concerns about the volatility of monthly Consumer Price Index (CPI), investors are not convinced that their response is adequate to contain the consequences of elevating banking stress.
The RBA’s concern about the CPI’s potential volatility is not new. However, investors are concerned that the RBA’s response to this volatility is ordinary, and not enough to address the long-term consequences of persistent inflation. As a result, investors are likely to become more cautious about the AUD/USD, which could push the currency pair down further.
The AUD/USD has been on a downward trend since August 2021, with the pair falling from a high of 0.7427 to a low of 0.7111. This downward trend is likely to continue as investors become more concerned about the RBA’s response to inflation.
RBA Policymakers Worried about Volatile CPI
The RBA has been closely monitoring the CPI for several months, with policymakers expressing concern about the volatility of the index from month to month. While the RBA has been able to keep inflation within its target range of 2-3% for several years, the recent increase in inflation has led to concerns about the long-term consequences of persistent inflation.
To address these concerns, the RBA has implemented several measures to control inflation, including keeping interest rates low and adjusting its monetary policy framework. However, these measures have not been sufficient to address the underlying issues causing inflation to remain stubbornly high.
Fed Could Consider Silence on Interest Rates to Contain Banking Stress
To contain the consequences of elevating banking stress, the US Federal Reserve (Fed) could consider remaining silent on interest rates. This strategy, known as forward guidance, involves the Fed signaling to investors that interest rates will remain low for an extended period of time, providing them with greater certainty about the future direction of interest rates.
However, the effectiveness of forward guidance in controlling inflation is still unclear. While some economists believe that it can be an effective tool in certain circumstances, others argue that it may be ineffective in controlling persistent inflation.
In conclusion, the RBA’s ordinary response to stubborn inflation is likely to push the AUD/USD down further as investors become more cautious about the long-term consequences of elevated banking stress. While the RBA has implemented several measures to control inflation, these measures may not be sufficient to address the underlying issues causing persistent inflation. Meanwhile, the Fed may consider remaining silent on interest rates to contain the consequences of elevated banking stress, although the effectiveness of this strategy remains unclear.