AUD/USD jumps higher to 0.6670 as US Inflation cools down expectedly

AUD/USD recovers daily losses and jumps to 0.6670 as US core PCE Inflation declines in May.
Soft US inflation figures would boost Fed rate-cut hopes.
The RBA is expected to deliver more rate hikes this year.

The AUD/USD pair revives intraday losses and surges to near 0.6670 in Friday’s New York session after the United States (US) Bureau of Economic Analysis (BEA) published a soft Personal Consumption Expenditure Price Index (PCE) report for May. The report showed that core inflation data grew at a slower pace of 0.1% from the prior release of 0.2%, as expected, on month-on-month. Also, the annual core PCE inflation decelerated expectedly to 2.6% from 2.8% in April.

An expected decline in the US inflation data is expected to spurt expectations for early rate cuts by the Federal Reserve (Fed). The scenario is unfavorable for the US Dollar. The US Dollar Index (DXY) has turned negative and has dropped to 105.80.

The CME FedWatch tool shows that the central bank sees the September meeting as the earliest point for pivoting to policy-normalization. As per the tool, the Fed is expected to deliver two rate cuts this year. Contrary to market expectations, Fed officials forecasted only one rate cut this year.

After the US inflation data release, San Francisco Fed Bank President Mary Daly told in an interview with CNBC that the soft PCE data is good news but we need more good data to gain confidence that inflation will decline to 2%.

On the Aussie front, expectations of more rate hikes by the Reserve Bank of Australia (RBA) have strengthened the Australian Dollar. Market speculation for RBA rate hikes grew further after monthly Consumer Price Index (CPI) data turned out hotter-than-expected on year-on-year. The inflation data rose at a faster pace of 4.0% than expectations of 3.8% and the prior release of 3.6%.

Economic Indicator

Core Personal Consumption Expenditures - Price Index (YoY)

The Core Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The PCE Price Index is also the Federal Reserve’s (Fed) preferred gauge of inflation. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The core reading excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures." Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

Why it matters to traders?

After publishing the GDP report, the US Bureau of Economic Analysis releases the Personal Consumption Expenditures (PCE) Price Index data alongside the monthly changes in Personal Spending and Personal Income. FOMC policymakers use the annual Core PCE Price Index, which excludes volatile food and energy prices, as their primary gauge of inflation. A stronger-than-expected reading could help the USD outperform its rivals as it would hint at a possible hawkish shift in the Fed’s forward guidance and vice versa.

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