The Australian dollar (AUD) is slightly higher on Wednesday, trading at 0.6674 in the European session, up 0.11% for the day. Australian retail sales saw a surprise increase of 0.6% month-over-month in May, surpassing market expectations of 0.3%. This was the largest gain since January, driven by retailers offering discounts and sales events.
Despite the positive monthly increase, there is still underlying weakness in consumer spending, as year-over-year retail sales only rose by 1.7% in May, compared to over 4% earlier in the year. The Reserve Bank of Australia (RBA) has hinted at potential rate hikes due to stubbornly high inflation, with discussions about a rate increase at recent meetings. The upcoming second-quarter report, to be released before the August 6 RBA meeting, will be crucial in determining the future of interest rates.
The market has priced in a 32% chance of a quarter-point rate hike at the August meeting, which would bring the cash rate to 4.6% and mark the first increase since November. The AUD/USD technical analysis will also play a role in shaping market expectations.