Soft US inflation data is countered by Hawkish Fed and AUD stuck in Familiar range
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Daily Currency Update
The Australian dollar lurched upward through trade on Wednesday but remains entrenched within a familiar trading band. It has been a fascinating 24 hours with markets propelling the AUD off session lows below US$0.66 to fresh 3-week highs north of US$0.67 following softer-than-anticipated US inflation data, only to be curtailed by a hawkish Federal Reserve (Fed). The AUD tracked sideways leading into the overnight session as all eyes were affixed to US CPI inflation and June's Fed monetary policy meeting. CPI numbers were weaker than expected with the annualised rate of inflation falling to 3.3%. The sharp decline drove US treasury yields lower and lifted expectations the Fed may issue at least 2 rate cuts before the year's end. However, Fed officials disappointed investors by adopting a more hawkish outlook and highlighting the need to see inflation continue easing before adjusting monetary policy. The Fed dot plot showed the average member expects to cut rates just once this year, allowing yields and the dollar to pare early losses forcing the AUD back toward US$0.6650.Our attentions turn now to Domestic employment data for May and US PPI data for direction through the day ahead.
Key Movers
It has been a wild 24 hours with the US DXY index testing April lows following softer-than-anticipated US inflation data. A cooler-than-anticipated US CPI print drove down US yields with 10-year rates falling 14 basis points and sent the USD tumbling as markets looked to price in at least two Fed rate cuts for 2024. The move was short-lived as the FOMC elected to leave rates on hold, adopting a hawkish stance and proffering a dot plot that suggests most members expect to cut rates just once before the year is out. Markets were forced to quickly pare back USD losses and yield moves as rates along the curve were recovering before the USD pulled back to close just half a per cent lower on the day.Against a backdrop of lower yields, the yen gains forced the USD back below 157 and the euro was afforded some reprieve from political uncertainty and punched back above 1.08. The GBP edged through 1.2750 to test a break above 1.28.
Our attention now turns to US PPI data. After the softer-than-expected CPI reading, this latest PPI update will be key in shaping inflation expectations as it's a key component in the Fed's preferred measure of inflation the PCE deflator index. We are also keenly attuned to US jobless claims and any hint the resilient labour market may be beginning to show signs of weakness.
Expected Ranges
- AUD/USD: 0.6580 - 0.6720 ▲
- AUD/EUR: 0.6100 - 0.6200 ▲
- GBP/AUD: 1.9100 - 1.9300 ▼
- AUD/NZD: 1.0700 - 1.0800 ▲
- AUD/CAD: 0.9080 - 0.9220 ▲