Australian Dollar edged up on Wednesday ahead of US CPI

  • AUD made mild gains on Wednesday against the USD.
  • Markets are still deciphering Jerome Powell’s cautious stance, which limits traction for USD.
  • RBA’s hawkish stance provides stable support for Aussie.

The Australian Dollar (AUD) continued its positive trend against the USD on Wednesday, mildly rising near 0.6750. Despite no significant pertinent events down the line for the Australian financial scene this week, the pair still maintains its stronghold, with the AUD continuing its recent gains. On the US side, markets await clues on the Federal Reserve’s (Fed) plans.

The Reserve Bank of Australia (RBA) is set to be among the last G10 nations’ central banks to initiate rate cuts, a factor that boosts the AUD.

Updated daily market movers: AUD holds ground after Powell’s words

  • Jerome Powell on Wednesday emphasized the need to pay elevated attention to the labor market, citing that it has significantly deteriorated.
  • In addition, he expressed a degree of confidence regarding the downward movement of inflation.
  • He stated that achieving price stability without hurting employment is achievable but didn’t provide a specific inflation or unemployment figure as a benchmark for deciding on rate cuts.
  • US CPI figures, coming on Thursday, will be crucial. The headline is projected to decrease slightly to 3.1% YoY, while the core is anticipated to remain steady at 3.4% YoY.
  • On the RBA’s side, markets bet on nearly a 50% chance of a hike in September or November. On the Fed’s side, investors are confident in an 80% likelihood of a cut in September.

Technical analysis: AUD/USD’s gains continue, consolidation expected

The AUD/USD continues on a rising trajectory, resulting in the pair making gains on Wednesday. The outlook remains positive with indicators including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) holding strong in deep positive territory.

Following the pair’s performance hitting its highest since January, the trend hints at an optimistic outlook. However, traders appear to be keeping an eye on consolidating these gains, which is limiting the upside.

Support levels to monitor are at 0.6670, 0.6650 and 0.6630 in case of a correction.

Inflation FAQs

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%.

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.

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.

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.