AUDUSD lurches higher following softer US inflation pressures

Daily currency update

The Australian dollar lurched upward through overnight trade on Thursday following a much softer-than-expected US CPI print. A downturn in core inflation measures versus consensus expectations prompted a swift rate correction as investors rushed to pare back expectations for future FED rate hikes. Having tracked sideways through much of the local session and the lead into the all-important inflation update, the AUD exploded upward, launching off lows below US$0.64 to touch 7-week highs above US$0.66. The question now is, can we sustain gains? The scale of the overnight move emphasises where short positions were concentrated and suggest a further depreciation in the broader USD outlook will support ongoing and outsized AUD upside. Signals the US economy is trending toward recession are growing more evident, and this softening in inflation pressures now gives the Fed impetus to temper the pace of rate hikes and attempt to massage the economy through what will undoubtedly be a tricky period ahead. With little of note on today’s domestic ticket, our attentions turn to US consumer sentiment data and UK 3rd quarter GDP data. Having turned negative in Q2 analysis, anticipate a 2nd quarterly contraction in Q3 making Britain the first major economy to enter economic recession, creating a potential opportunity for the AUD to recapture £0.57.

Key movers

US CPI inflation dominates direction overnight, driving the dollar lower and empowering a sharp uplift across key major counterparts. Despite a marginal uplift in headline inflation, the modest bump in core inflation pressures fell well short of market expectations, with alternative measures and input data suggesting a softening in price pressures. While we saw a further unwinding in the cost of goods elevated through the pandemic, a correction in service inflation helped ease fears rising costs were becoming more deeply entrenched in the broader economy. While leading measures of inflation have been pointing downward for some time, this is the first time we are seeing the easing in price pressures borne out in headline inflation data. The softening in inflation pressures gives the Fed scope to temper the pace of future rate hikes. The market is now increasingly confident policy makers will pare back interest rate hikes next month, issuing a 50 basis point hike, with a softening in labour market data potentially opening the door to the possibility of a more traditional 25-point adjustment. The Peak Fed Funds rate has plunged since last Wednesday’s Fed and Federal Open Market Committee policy, meeting below 5% to sit at 4.88% in Q2 next year. The scale of price action across currency markets has been aggressive, with those concentrated short positions the big winners. The correction in US rates has seen the JPY surge, with the USD down 3% and falling below ¥142, while the GBP enjoyed support up nearly 3%, while the euro consolidated a break above parity and extended back above € 1.01 and €1.02.

Expected ranges

• AUD/USD: 0.6480 – 0.6650 ▲
• AUD/EUR: 0.6380 – 0.6520 ▲
• GBP/AUD: 1.7580 – 1.7880 ▲
• AUD/NZD: 1.0920 – 1.1020 ▲
• AUD/CAD: 0.8670 – 0.8850 ▲