Fundamental analytics

Australian Dollar Weakens Despite Signs of an Upturn in Inflation

AUDUSD

The Australian dollar weakened against most of its major peers on Friday, on its way to end the week with a broad decline as it continued to display resilience to positive economic news. Today’s weak performance came despite the latest update for producer prices, which hinted at an improved inflation in the end of 2017, as investors anticipated an interest rate decision from the Reserve Bank of Australia on Tuesday.

 

The Australian dollar lost 0.33 percent against the British pound during trading on Friday to touch 1.7801 Australian dollars per pound, its weakest level since December 8. The Australian currency also fell against the euro, declining by 0.48 percent to 1.5636 per euro. The U.S. dollar climbed by 0.66 percent against its Australian counterpart to 0.7987 per U.S. dollar.

 

Prices of goods at factory gates went up in the fourth quarter of 2017, according to fresh data from the Australian Bureau of Statistics. The producer price index rose by 0.6 percent on a quarterly basis to beat analyst estimates of a smaller 0.2 percent increase.

 

The index also outperformed during the twelve months leading to December, climbing by 1.7 percent from 1.6 percent in November. Meanwhile, economists expected the index to drop to 1.2 percent. The higher producer prices were mainly due to increases in petroleum products and construction.

 

Australian producer prices act as a main indicator for changes in consumer prices, which accounts for the majority of overall inflation. Policymakers within the Reserve Bank of Australia keep a close eye on producer prices data. However, today’s gains are not likely to change the central bank’s stance on interest rate hikes.

 

Inflation has remained below the central bank’s target of 2 percent to 3 percent for more than two years. Policymakers are widely expected to maintain their monetary policy unchanged when they announce their next interest rate decision in a statement that will be released next Tuesday. However, investors will look for signals within the statement on when the next change in monetary policy might be.

 

Investors’ anticipation appears to be limiting the Australian dollar’s responsiveness to positive news like today’s data, especially as it comes in the wake of weaker gain in consumer prices than expected in the last quarter.

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