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Week domestic data and overall profit-taking in the markets weighed on the Aussie last week. Will the bulls redeem themselves with this week’s catalysts?

Retail sales and trade balance reports

Tomorrow at 12:30 am GMT Australia will print not one, but two top-tier events.

Retail sales is expected to dip by 0.2% in December after rising by 1.2% in November. And why not? Some believe that IphoneX and Black Friday sales helped boost November’s numbers to its fastest pace since 2013, so it makes sense to see some kind of pullback in December.

Meanwhile, Australia is expected to print a 0.25B AUD surplus after showing a 0.63B AUD deficit in November. If you recall, market players were shook when exports clocked in flat despite higher commodity prices. Let’s see if November’s data was just a blip!

RBA’s policy statement

That’s right! A few hours after the retail sales and trade balance releases comes the Reserve Bank of Australia (RBA)’s monetary policy decision.

Last week’s quarterly CPI data killed speculations of any short-term interest rate hikes from the RBA. Will the central bank continue to shrug off these CPI misses in favor of a rosier outlook? Or will they recognize that it will take a bit longer to achieve their inflation targets?

Last Week’s Price Review

The Aussie had a really hard time this week, so much so that it’s currently the worst-performing currency of the week (as of 7:00 am GMT).

Overlay of AUD Pairs & Gold (Black Line): 1-Hour Forex Chart
Overlay of AUD Pairs & Gold (Black Line): 1-Hour Forex Chart

And as you can see in the overlay of AUD pairs and gold (black line) above, the Aussie didn’t really track gold prices that closely. Moreover, the Aussie is on the losing side of the forex arena, even though gold prices are about flat for the week.

And while iron ore prices did slump this week, Aussie pairs didn’t really take directional cues from iron ore, as can be seen in the overlay of AUD pairs and iron ore futures (black line) below.

Overlay of AUD Pairs & Iron Ore (Black Line): 1-Hour Forex Chart
Overlay of AUD Pairs & Iron Ore (Black Line): 1-Hour Forex Chart

Anyhow, the Aussie’s price action was a bit mixed from Monday until Tuesday. However, the Aussie later got a sharp kick lower during Wednesday’s Asian session, apparently as a reaction to Australia’s disappointing Q4 CPI report.

As for specifics, headline CPI in Australia only rose by 0.6% in Q4, which is a tick slower compared to the +0.7% consensus.

Overlay of AUD Pairs: 1-Hour Forex Chart
Overlay of AUD Pairs: 1-Hour Forex Chart

More importantly (for monetary policy and rate hike expectations), headline CPI only increased by 1.9% year-on-year, missing the RBA’s 2017 forecast of +2.0%, as laid out in the RBA’s November Statement on Monetary Policy.

Trimmed mean CPI, the RBA’s preferred measure for the “core” CPI reading, also failed to impress since it came in at 0.4% quarter-on-quarter (+0.5% expected).

But on a slightly more upbeat note, the annual reading for trimmed mean CPI came in at 1.8% year-on-year, which is within the RBA’s expectations, which is probably why follow-through selling was limited. Although gold and iron ore were also on the rise at the time, which probably helped to support the Aussie.

Unfortunately for the Aussie, broad-based selling pressure returned during Wednesday’s U.S. session. And this time, bearish pressure didn’t let up on most pairs until the end of the week. And it’s this broad-based slide that’s the reason for the Aussie’s poor performance this week.

So what happened during Wednesday’s U.S. session? Well, nothing much to be honest. Monetary policy divergence between the RBA and the FED and ECB was cited by some market analysts, which makes sense since Australia’s relatively poor CPI report doesn’t really help to bolster expectations that the RBA will sound hawkish in next week’s RBA statement.

The FOMC statement, meanwhile, not only reinforced expectations that the Fed is still on track for more rate hikes this year, but also raised expectations that the ECB may be soon be tightening as well, based on Euro Zone bond yields.

However, the Aussie was already moving lower hours before the FOMC statement even rolled around. Although it’s likely that monetary policy divergence did play a role in pushing the Aussie lower post-FOMC statement.

Anyhow, some market analysts think that the Aussie’s pre-FOMC slide was just due to technicals since the Aussie looked somewhat toppish.

Although profit-taking ahead of next week’s RBA statement, as well as profit-taking ahead of the FOMC statement, are also possibilities. After all the Aussie has been on a tear against the Greenback since December.

AUD/USD: 1-Hour Forex Chart
AUD/USD: 1-Hour Forex Chart

Another possibility is month-end flows since Wednesday marked the last day of January, so some month-end capital flows are to expected as hedge funds, mutual funds, pension funds, and other large players rebalance their portfolios and/or prepare to make cash distributions.