US CPI surprise prompts AUD collapse

Key Movers

The Australian dollar retreated through trade on Tuesday, crumbling in the wake of a stronger than anticipated US CPI inflation print. A broad improvement in the underlying risk narrative helped the AUD build on the week’s early gains, extending through 0.69 US cents to mark intraday highs at 0.6925. Markets had positioned these price actions to abound through trade on Tuesday as markets rushed to adjust positions following a surprise uptick in US inflation pressures. Markets had positioned themselves for another downward correction in US inflation following a modest decline in gas prices and other key consumables. While headline CPI was dragged down by falling oil prices the final print still showed a 0.1% increase through August compared with median estimates for a 0.1% contraction. The surprise uptick in headline CPI was dwarfed by a 0.6% jump in core CPI, a measure that excluded volatile consumables such as food and gasoline. The huge monthly lift was well beyond even aggressive market estimates. Where we hoped to see a moderate correction in price pressures, we have seen inflation spread more broadly across the economy, capturing new sectors and pushing back the timeline to inflation normality. The USD surged on the heels of the print as US rates lurched higher and investors rushed to haven assets in a broad risk off move.
In other news the UK unemployment rate fell to its lowest level in almost 50 years and offers the Bank of England some comfort the tight labour market will provide some cushioning for higher interest rates as it attempts to battle inflation.
Further details regarding the EU energy plan have leaked to the market with Blomberg reporting the EU hopes to cap prices at 180 Euro per Megawatt hour while employing measures to cut consumption by up to 10%. We expect a complete plan to be issued in the coming weeks. Having enjoyed an early uptick both the GBP and EUR tracked sharply lower after the US inflation print with the GBP forced back toward 1.15 while the Euro slipped back below parity. lves for another positive inflation update so the surprise uptick across both headline and core price indexes forced investors to rapidly re-adjust positions and expectations for future Fed monetary policy. The AUD collapsed in the aftermath, plunging back through 0.69 and 0.68 before finding support at 0.6730. The strong print has driven investors to fully price in a 75-basis point rate hike with a growing expectation the Fed may elect to issue a full 1% rate adjustment. The sustained presence of elevated prices helped drive USD upside as higher US rates and renewed demand for safe haven assets weighed on the AUD. Our attentions turn now to UK CPI data and a US PPI print. Elevated inflationary indicators will likely weigh on risk appetite and continue to suppress any meaningful AUD recovery.