- Australian Dollar is a top performer from the session, favored by hot CPI figures from May.
- Following May’s hot CPI figures, the market closely watches further inflation indications for potential RBA action.
- If the RBA holds hawkish, the downside for the Aussie is limited.
Wednesday’s session observed an incline in the Australian Dollar (AUD), as it rose to the mark of 0.6690 against the US Dollar, before retracing back to the 0.6650 mark. The recently released Australian inflation data, which came in higher than expected, benefited the Aussie against its peers, but the Greenback itself is also trading with vigor.
In Australia, despite signs of a weaker economy, the stubbornly high inflation acts as a hindrance to the Reserve Bank of Australia’s (RBA) potential rate cuts, potentially limiting downside pressure on the Aussie.
Daily Digest Market Movers: Aussie shows resilience amid hot CPI figures
- On the data front, Australia’s May Consumer Price Index CPI ran hot. The headline came in at 4.0% YoY vs. 3.8% expected and 3.6% in the previous month.
- This marked the third consecutive month of acceleration to the highest since November, moving further above the 2-3% target range
- As a result of these developments, the swaps market is now pricing in nearly 40% odds of a 25 bps rate hike on September 24, extending to nearly 50% for November 5.
- In the last meeting, Governor Bullock affirmed the RBA “will do what is necessary” to bring inflation back to target and foresees a longer period before inflation gets sustainably back in the target range.
- Accordingly, with the RBA ruling out rate cuts and with markets potentially considering rate hikes, the downside on the Aussie is set to remain constrained.
Technical analysis: AUD/USD looks to retain buyer interest at 20-day average
From a technical standpoint, the outlook remains fairly neutral with no clear directions. The Relative Strength Index (RSI) continues to stay above 50 but remains flat. The Moving Average Convergence Divergence (MACD) continues in the negative sphere with a series of red bars. Anticipation builds around buyers retaining the AUD/USD above the 20-day Simple Moving Average (SMA), a key defensive line that could dictate the future momentum of the pair.
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.
