Australian Dollar consolidates gains as dwindling Fed hiking hopes hurt the US Dollar
- AUD/USD consolidates gains at 0.7000 after rallying 1.25% over the last two days.
- Dollar weakness following soft US inflation figures is underpinning the Aussie's rally.
- The decline in Australian Consumer Inflation Expectations has failed to dent the Australian Dollar's bullish trend.
The Australian Dollar (AUD) trades practically flat against a weaker US Dollar (USD) on Thursday as investors pare back bets of immediate Fed tightening, following unexpectedly soft US inflation figures earlier in the week. The AUD/USD pair consolidates at 0.7000 at the time of writing, after rallying about 1.25% earlier this week.
US Producer Prices Index (PPI) data released on Wednesday showed that factory inflation contracted 0.3% in June, down from a 0.6% increase in May and below expectations of a 0% reading. The year-on-year PPI eased to 5.5% from 6% in the previous month, below the market consensus of 6.2%.
PPI data follows another contraction in the Consumer Price Index (CPI), which posted its largest monthly drop in nearly six years in June. Likewise, the yearly CPI slowed down to its lowest rate since March, at the beginning of the US-Iran war, and
These figures hint at a soft Personal Consumption Expenditures (PCE) Price Index report and have prompted investors to effectively rule out a Federal Reserve (Fed) rate hike in July and to cut back hopes of monetary tightening in September, sending the US Dollar lower across the board.
The Aussie Dollar, on the other hand, has remained resilient to the decline in Consumer Inflation Expectations, which fell to 4.7% in July, its lowest rate since January, from 5.5% in June. These figures have failed to clear the outlook for the Reserve Bank of Australia’s monetary policy, but they did not dent the Aussie's bullish trend either.
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.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
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