Australian CPI falls but markets not impressed

The Australian dollar continues to have a quiet week. AUD/USD is trading at 0.6796 in the European session, up 0.06% on the day at the time of writing.

Australian CPI dips to 3.5%

Australia’s inflation rate continued to decelerate in July, although the markets were hoping for more. CPI rose 3.5%, down from 3.8% in June but above the market estimate of 3.4%. This was the lowest figure since March but much of the decline was driven by electricity rebates which artificially lowered electricity prices.

Core inflation eased but goods inflation remained flat. The markets weren’t impressed with the inflation data and the odds of a rate cut in November fell to 48%, down from 58% prior to the inflation release.

The markets are more dovish than the Reserve Bank of Australia, which has discussed raising rates at recent meetings. The central bank is not satisfied with the pace of underlying inflation and has projected that it won’t return to the target band of 2% to 3% until the end of 2025. Governor Bullock has said that the Bank has no plans to cut for at least six months, but the markets are betting that the RBA won’t stay on the sidelines while the Fed and other major central banks are lowering rates.

The financial markets are hanging onto every word from FOMC members and we’ll hear from members Christopher Waller later today and Rafael Bostic early on Thursday. As well, the US releases second estimate GDP for the second quarter on Thursday.

The initial estimate showed the economy powering ahead with a 2.8% gain, double the 1.4% pace in Q1. The second estimate is expected to confirm the initial reading and confirm that the economy remains in solid shape, despite concerns about a weak employment labor which led to a market meltdown earlier this month.

AUD/USD technical

• AUD/USD is testing support at 0.6784. Below, there is support at 0.6771.

• 0.6805 and 0.6818 are the next resistance lines.