AUD/USD steady as market reaction to US inflation update muted

Daily currency update

The Australian dollar opens this morning marginally higher as investors move beyond the much-anticipated US CPI inflation update and toward commentary from RBA governor Lowe as he addresses a senate committee on Monetary Policy. The AUD maintained a narrow trading handle through the domestic session bouncing between US$0.6950 and US$0.6980 as investors looked to sideline major bets until after the US CPI inflation data was released. The monthly release showed both headline and core measures of inflation had moderated in line with consensus estimates. The AUD lurched higher as investors hoped the sustained decline in price pressures might prompt a correction in Fed monetary policy expectations, however, closer analysis showed inflation remains sticky and even though leading indicators suggest weaker inflation ahead prices are taking much too long to moderate. Fed commentators speaking after the data seemed content in seeing pressures ease but reiterated the need to raise rates higher than first expected. Tighter fed policy expectations drove the USD and US rates higher and forced the AUD toward intraday lows at US$0.6930. Having found support the AUD worked to claw back losses and opens this morning slightly above its pre-data level buying US$0.6991. Attentions turn now to RBA Governor Lowe as he addresses a senate hearing on Monetary Policy. Given last week’s hawkish RBA surprise and rising peak interest rate estimates we are keenly attuned to any forward guidance that will help shape rate expectations.

Key movers

Price action across major currencies was largely subdued with most majors moving within the 0.2% range leading into and out of much anticipated US inflation data. Prices moderated in line with consensus estimates while Fed commentators reiterated the need for steady and consistent monetary policy. Despite moderating inflation pressures remain too high and the pace of disinflation to slow for key policy makers. Having tempered monetary policy expectations through January markets are now resigned to the reality of more near-term rate hikes. With two additional Fed rate hikes now priced in the USD index edged upward on the day led by gains won against the JPY while the euro and the GBP offered little to excite investors. In other news, UK labour market data showed wage growth remains strong as labour market conditions continue to tighten. Fears of a wage-price as wages attempt to keep up with inflation will likely trouble the Bank of England’s Monetary Policy Committee as it battles to stave off recession while driving down persistent price pressures. Our attentions turn now to UK CPI data and US retail sales. We anticipate an uptick in spending through January as consumers that delayed purchases leading into the holidays look to take advantage of post-holiday sales. Robust consumer activity will only affirm the Fed’s commitment to higher rates and likely underpin recent USD gains.

Expected ranges

• AUD/USD: 0.6880 – 0.7020 ▲
• AUD/EUR: 0.6420 – 0.6520 ▲
• GBP/AUD: 1.7280 – 1.7580 ▲
• AUD/NZD: 1.0940 – 1.1080 ▲
• AUD/CAD: 0.9250 – 0.9350 ▲