AUD looks set to remain under near-term pressureAussie CPI inflation is main risk event this weekGBPAUD could test 2023 highs on CPI undershootGlobal economic slowdown pressures commodity prices

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The Australian Dollar is one of the laggards of global foreign exchange, having fallen 2.16% against the Pound and 2.87% against the Dollar in the previous week, with analysts suggesting there is little to indicate recent short-term trends are about to reverse owing to deteriorating global growth conditions.

But the domestic highlight for the coming week will be the release of Australian CPI inflation data on Wednesday which would likely firm up expectations for the Reserve Bank of Australia's July 04 interest rate decision.

This will therefore be a key data event as the Australian Dollar's recent decline has been attributed to "confusion over RBA communication," according to Sean Callow, Senior Currency Strategist at Westpac.

A firmer set of figures would likely settle expectations for another interest rate hike, "AUD/USD may receive a short‑term bump up if the May CPI (Wednesday) is stronger than the consensus of Australian economists as we expect," says Carol Kong, a strategist with Commonwealth Bank of Australia.

Any uplift in AUD/USD would likely prompt a mechanical downshift in the Pound to Australian Dollar exchange rate (GBPAUD), which has recovered of late and looks intent to threaten a retest 2023's highs just above 1.91.

"After a strong start to June, the Aussie has very much fallen back to the pack," notes Callow.

Above: GBPAUD and AUDUSD (bottom) at one-week intervals.

Any undershoot of inflation would immediately raise questions as to whether the stop-start approach to rates at the central bank means another pause is in the offing. The downside risks to the inflation release are therefore relatively elevated on any undershoot: the market is looking for inflation to have risen to 0.1% month-on-month in May, up from the flat 0% reported in April.

"AUD began its slide on the release of the RBA June minutes which sounded a little less hawkish than the statement and RBA Governor Lowe's 7 June speech. In particular, markets seemed to react to the description as 'finely balanced' of the arguments for holding steady versus hiking," he adds.

Softer-than-expected inflation figures could therefore tip a 'finely balanced' RBA back towards holding interest rates unchanged, potentially undoing the gains made by the AUD following June's surprise rate hike.

Further gains are possible for GBPAUD and a test of the 2023 high at 1.9183 cannot be ruled out in the event inflation undershoots and global economic growth expectations remain subdued.

Last week's RBA minutes coincided with other headwinds for the Aussie Dollar that include a fresh downturn in commodity prices owing to lacklustre Chinese data and increased fears for a broader global economic slowdown linked to rising central bank interest rates.

"The AUD was the worst performer of the G10 currencies over the week," says Taylor Nugent, an analyst at National Australia Bank. "Global growth concerns did the AUD no favours."

The Chinese post-Covid economic rebound has failed to live up to the lofty expectations that were in place at the start of the year, prompting authorities to put in place stimulus measures to try and boost growth in Australia's most important export market. Kong says an absence of news on China's speculated economic stimulus package and the events in Russia can also pull AUD/USD further down to CBA's end‑June forecast of 0.6400.

"Local media have cited a number of expected steps to support the economy, but many new policies appear to be very targeted to specific sectors. Moreover, despite very low inflation. China cut its benchmark interest rates by only 10bp, the 1-year loan prime rate nudged from 3.65% to 3.55%," says Callow.

Thus far measures have not resulted in eye-catching growth numbers, disappointing Aussie Dollar bulls. But another concern has emerged regarding the broader global economy which appears to be slowing in the face of rising central bank interest rates.

"The widespread ongoing increases in central bank’s policy interest rates will slow the global economy, weigh on commodity prices and AUD," says Kong.

"Last week reinforced that central banks are still grappling to get fully on top of inflation. The Bank of England upped the pace of interest rate increases to 50bp, taking its policy rate to 5%," says Nick Tuffley, an economist at ASB.

The Norges Bank and Swiss National Bank also hiked as did the Central Bank of Turkey which went with a 650bp hike to lift the borrowing rate to 15%.

Expectations for further rate hikes out of the U.S. Federal Reserve and the European Central Bank mean the rate hiking cycle continues to extend itself and economists warn there is a chance central banks risk overhiking.

The current "shocking decline in the money supply" as a result of rate hikes is being ignored by central bankers, and this could yet result in "financial collapse" warns Albert Edwards, Co-head of Global Strategy at Société Générale.

Edwards says these late-cycle interest rate hikes could prove to be a mistake in the same vein as these same central bankers made mistakes when dismissing the prospect of a surge in inflation that has subsequently proved unwilling to fall back.

He notes money supply in the U.S. is falling at the fastest rate since The Great Depression, meaning if monetarists are right "economic growth and inflation may soon collapse as central bankers make yet another huge policy error."

"It will also come as a big shock to investors who, as usual, are giving up on their forecasts of recession, just as one looms into view," he warns, citing evidence that "economists usually give up forecasting a recession immediately before it occurs."

Should a global recession come to fruition, pro-cyclical currencies such as the Australian Dollar can be expected to underperform the likes of the Dollar, Euro, Yen and Pound, suggesting the medium-term outlook remains challenging for the Aussie.