AUD tracks sideways as all eyes turn to US Inflation update

Daily currency update

The Australian dollar maintained a narrow trading range through Tuesday, tracking sideways as investors eye tonight’s all-important US CPI inflation print. A decline in domestic consumer confidence and an uptick in business conditions and business confidence had little impact on AUD value through the domestic session. The AUD tracked between 0.6980 and 0.70 US cents in the lead up to offshore trade before edging toward 0.6950 and closing lower on the day. US treasury yields climbed overnight with both 2 and 10 year rates rising as markets look to adjust positions ahead of US inflation data. It is evident markets are nervous, squaring positions so as to quickly respond to another inflationary surprise. There is an expectation that falling gas prices will have contributed to a moderation in headline CPI pressures through July while Core inflation will still be elevated. A robust read across both data points will likely force the Fed to extend its program of rate hikes and push back expectations of an unwinding in monetary policy conditions. Having toyed with a break above 0.70 US cents tonight’s print could be the catalyst that propels the AUD through resistance or the marker that keeps near term AUD upside in check.

Key movers

There was little price action across major currencies through trade on Tuesday as markets square positions ahead of a critical US inflation update. US treasury yields rose with 2 Year rates up 7 basis points and 10-year rates up 4 while the spread between 2 and 10 year yields moved deeper into negative territory. The inversion in the yield and widening gap between near and long run rates through the last 10 days is a clear signal markets anticipate economic recession. Tonight’s CPI inflation print will prove critical in governing the Fed’s medium-term monetary policy response. Another surprise uptick will force policymakers to continue raising rates at pace, killing economic activity and hastening the run toward recession, while an easing in price pressures will allow the Fed scope to moderate the pace of future rate hikes and potential nurse the economy toward a softer landing and shallower/shorter recession. With market nerves elevated we expect ample volatility in the wake of the data release as our attention then shifts to Key FOMC policymakers Charles Evans and Neel Kashkari for an immediate response on how inflation conditions will impact Fed decision making.

Expected ranges

• AUD/USD: 0.6880 – 0.7080 ▼
• AUD/EUR: 0.6780 – 0.6880 ▼
• GBP/AUD: 1.7220 – 1.7420 ▲
• AUD/NZD: 1.1020 – 1.1120 ▼
• AUD/CAD: 0.8950 – 0.9020 ▼