AUD tumbles as UK inflation pressures spark risk-off shift

Daily Currency Update

The Australian dollar underperformed through trade on Wednesday, tumbling 1% and slipping back below US$0.6950 amid a surge in global bond rates and general risk-off shift. Having tracked sideways through the domestic session the AUD came under increased selling pressure overnight after UK CPI data showed a larger than anticipated increase in July. Annual headline inflation climbed through 10% as prices rose by 0.6% through the month of July. The sharp increase drove investors toward haven assets, propping up bond yields while weighing on equity markets and risk-sensitive currencies. Having touched intraday lows at US$0.6912 the AUD found some support following the release of the Fed’s FOMC meeting minutes. The minutes revealed policymakers expressed concern that elevated inflation pressures may become entrenched within the economy forcing the Fed to overtighten monetary policy, fostering a deeper economic recession. The dovish tone allowed the AUD to climb back toward US$0.6950.

In other news, a downside surprise in Australian wage price growth triggered an AUD downturn against key cross-currency counterparts. While leading indicators point to a significant lift in wages ahead, Q2 wage growth printed short of expectations exacerbating the cost of living pressures and dampening the consumer outlook. We turn our focus now to employment data. We anticipate unemployment will remain near record lows while job growth will remain healthy. A robust labour market and the promise of higher wages to come should give the RBA impetus to accelerate the pace of interest rate hikes, potentially helping to add a floor underneath the AUD.