Positive News Strengthens the Prospects for the Australian Dollar

[Ben Graham]

The Westpac Consumer Sentiment Index rose by 12.8% in October to 103.8%, marking the first positive reading for the index since February 2022. The positivity rate has significantly increased, reaching its highest level in 7 years, excluding the COVID period. While the sentiment is considered moderately positive rather than sharply optimistic, it appears the prolonged period of pessimism has come to an end.

The index's growth can largely be attributed to a reassessment of economic prospects, with expected growth rates of 16.6% and 15.3% over the 1-year and 5-year horizons, respectively. There are clear signs that recovery is gaining momentum, particularly concerning consumer demand and the housing market. Additionally, the reduction of external threats, following agreements reached between China and the U.S. at the highest levels, is viewed positively.

It is also noteworthy that the threat of rising inflation is becoming less concerning for consumers, which is an obvious surprise given the inflation growth in the third quarter. The fact that consumers are now less fearful of rising inflation benefits the AUD, as it supports increased demand, leading to elevated activity in the services sector and, consequently, higher prices.

The NAB indexes on business confidence and business conditions published this morning were much more subdued. Businesses reported a 1-point decline in confidence and a 1-point increase in conditions, indicating minimal changes.

After the RBA maintained the rate at 3.6% last week, expert commentary cited the threat of renewed inflationary pressures as the primary reason for the decision. The new RBA forecasts show a significant upward revision of the trimmed mean inflation, which is expected to remain above 3% until mid-2026, returning to 2.6% only by mid-2027 (delayed by 18 months compared to the August statement). This revision is bullish for the AUD, as it implies a higher RBA rate during the considered period than in August.

The main event this week in Australia will be the publication of the quarterly labor market report on Thursday. Employment growth this year has slowed despite an acceleration in growth rates, and the unemployment rate has slightly increased. NAB expects an employment gain of 20,000 in October and a decrease in the unemployment rate to 4.4%, while the RBA forecasts a steady unemployment rate of 4.4%.

The calculated price is moving downward, increasing the chances of a breakout from the horizontal range to the downside.

The AUD/USD pair is currently remaining within a horizontal range, but tension is mounting. Factors favoring a decline include the revision of the Fed rate forecasts, suggesting a stronger dollar, while factors supporting growth include the U.S. government exiting the shutdown, which is expected to boost risk demand, as well as the revision of inflation forecasts in Australia and the RBA rate.

At this point, it is unclear which factors appear more favorable, so caution is advised. In the event of a rise, the nearest resistance is at 0.6580/90; if the AUD can breach this level, the chances of a stronger rise to 0.6620/30 will increase. A decline will become more likely if there are grounds for strengthening the dollar across the currency market, in which case key support is at 0.6415/20.

The material has been provided by InstaForex Company - www.instaforex.com