AUD/USD outpaces counterparts as consumers prove resilient in face of rising domestic inflation pressures

Daily currency update

The Australian dollar outpaced major counterparts through trade on Wednesday, consolidating a break above US$0.69 following robust domestic retail sales activity and sustained domestic inflation pressures. Monthly inflation data showed a larger than anticipated uptick in price pressures through November affirming fears the downturn seen in October was “not” part of a larger easing in the inflationary burden. Despite sustained cost of living demands domestic retails remain steady as Australian consumers increased spending through the holiday season. The uptick in inflation and stability across consumer activity elevated expectations the RBA will continue to hike rates through February and March. The promise of higher domestic interest rates helped lift the AUD toward intraday highs at US$0.6925 before an overnight rally in US rates markets leading into today’s US CPI update forced a move back toward US$0.69. Tonight’s US inflation print remains the premier item on the day’s macroeconomic docket and we anticipate the AUD will maintain a narrow range through the lead in. With most analyst anticipating a fall in inflation pressures a read near consensus will likely increase expectations for a slowdown in the pace of Fed rate hikes and could help propel the AUD toward US$0.70.

Key movers

With little news flow on hand to drive direction through trade on Wednesday price action across major currencies offered little to excite investors. The AUD stood out as the day’s top performer while the Swiss Franc faltered giving up near 1% and was the days leading underperformer. With the Euro and GBP largely flat market attentions are clearly affixed to tonight’s US inflation print. As we near the peak in the expected Fed funds rate the pace of ongoing rate hikes depends heavily on the persistence of inflation pressures. Having seemingly peaked through Q4 last year policy makers have suggested a penchant for slowing the pace of monetary policy adjustment affording more time to assess and digest the impact of rising interest rates. Fears of a mid-year recession remain real and a slower pace of rate hikes at the very least may help the Fed cushion the fall. We expect headline inflation will move back below 7% printing 6.5%, while core inflation should move nearer 5.7% year on year. An outcome in line with consensus expectations will likely elevate calls for a 25-basis point rate hike in February followed by a 2^nd quarter point hike in March and a 3^rd in May with rates then holding into the end of the year. A slow down in the pace of hikes and a clear path to a peak Fed Funds rate could weigh on the USD and prompt a break below key technical support lines. That said a surprise uptick in price pressures will push the Fed to keep the foot down and continuing raising rates in half point increments, likely lifting expectations for the peak rate and drive a near term USD rebound.

Expected ranges

• AUD/USD: 0.6820 – 0.7020 ▲
• AUD/EUR: 0.6350 – 0.6450 ▲
• GBP/AUD: 1.7420 – 17720 ▼
• AUD/NZD: 1.0780 – 1.0920 ▲
• AUD/CAD: 0.9220 – 0.9320 ▲