The AUD/USD pair saw a decline after the release of Australian Current Account Balance data for Q1, which showed a deficit instead of an expected surplus. This deficit was caused by lower profits from exports and an increase in the net primary income deficit. As a result, many economists have lowered their GDP growth estimates for Q1, with Westpac revising its forecast to 0.0% quarterly growth and 1.0% yearly growth. Other data for Australia showed a mixed picture for inflation, with the Melbourne Institute Monthly Inflation Gauge rising by 0.3% MoM in May.
On the other hand, the US Dollar saw a bounce back on Tuesday after a steep decline on Monday following lower-than-expected ISM Manufacturing PMIs for the US. This decline in manufacturing was attributed to a drop in the “New Orders” subcomponent, raising concerns about future growth. This has led to increased bets that the Federal Reserve may cut interest rates in September. In contrast, the Reserve Bank of Australia is not expected to cut interest rates until 2025 due to high inflation in Australia.
The outlook for the AUD/USD pair supports the Australian Dollar more than the US Dollar, as it will likely close the rate differential between the two countries. Currently, the higher interest rates in the US support the USD, but if the gap narrows, the AUD could rise due to the narrowing differential. This provides a backwind for the pair, as the RBA is viewed as the last G10 central bank likely to begin cutting interest rates.
Overall, the economic data for Australia and the US has had an impact on the AUD/USD pair, with the Australian Dollar facing pressure from the current account deficit and lower growth prospects. Meanwhile, the US Dollar has seen some recovery following disappointing manufacturing data, with expectations of a rate cut by the Federal Reserve in September. The outlook for the pair suggests that the AUD may gain strength against the USD as the rate differential between the two countries narrows.
