Australian Dollar strong as investors digest US CPI figures

Australian Dollar is rising against the US Dollar after the latest US inflation data showed a decline in the CPI.
RBA’s Hunter spoke about Australia's labor market, highlighting that it is still tight relative to full employment.
As the RBA remains hawkish, the AUD/USD pair’s upside is open.

The AUD/USD rose by 0.25% to 0.6670 on Wednesday as markets reacted to the release of US inflation data and comments from the Reserve Bank of Australia (RBA). The US Consumer Price Index (CPI) showed a decline in the annual rate of price increases, raising hopes that the Federal Reserve (Fed) may slow the pace of interest rate hikes.

In the face of a complex economic outlook, the Reserve Bank of Australia's (RBA) aggressive stance against high inflation has tempered market expectations. With inflation remaining elevated, investors now anticipate a more gradual easing of monetary policy, forecasting only a 0.25% interest rate reduction by 2024.

Daily digest market movers: Australian Dollar gains on US CPI figures and RBA signals

RBA Assistant Governor Sarah Hunter's comments supported the RBA's case against near-term policy rate cuts, which boosted the AUD. Hunter commented that the labor market is still tight relative to full employment, which reiterated the bank’s hawkish stance.
On the US side, CPI declined to 2.5% YoY, below the consensus estimate of 2.7% and the previous reading of 2.9%.
Core CPI, which excludes volatile food and energy prices, rose 3.2% YoY, matching the market expectation and July's increase.
On a monthly basis, the CPI increased 0.2%, while the core CPI rose above consensus to 0.3%.
Money market futures traders have slashed the odds for a 50 bps rate cut by the Fed to 15% and increased the probability of a 25 bps cut to 85%.
Despite its hawkish stance, the RBA is likely to join the global easing cycle later this year due to weak underlying economic activity and lower inflation pressure.
If the Fed and RBA policies align, the Aussie may see further downside.

AUD/USD technical outlook: Pair faces a mixed outlook while indicators recover

The pair is trading in a mixed outlook, according to the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) and price action. The RSI is rising sharply, this implies that buying pressure is recovering while it still remains in negative terrain. The MACD is decreasing and red. This generally suggests that selling pressure is losing strength.

The pair is facing some resistance at 0.6700. A break above this level could lead to further gains toward 0.6740. On the downside, support can be found at 0.6660 and 0.6620. A break below these levels could see the pair falling toward 0.6600.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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