AUD/USD aims to recapture 0.6800 as cooling US inflation amplifies Fed rate-cut bets

AUD/USD remains firm as the US Dollar weakens due to easing price pressures.
Soft US inflation data for June boosts Fed rate-cut prospects.
The Australian Dollar will dance to the tunes of the outcome of China’s third plenum meeting.

Sagar Dua FXStreet

The AUD/USD pair rises after a mild correction to near 0.6755 in Friday’s European session. The Aussie asset aims to recapture the round-level resistance of 0.6800 as the US Dollar (USD) is under severe pressure due to growing speculation for the Federal Reserve (Fed) to start lowering interest rates from the September meeting.

The expectations for Fed rate cuts swell after the United States (US) Consumer Price Index (CPI) report for June signalled that progress in disinflation has resumed after stalling in the first quarter of this year. Annually, the headline inflation decelerated at a faster pace to 3.0% and the core CPI, which excludes volatile food and energy items, unexpectedly declined to 3.3%.

According to the CME FedWatch tool, a rate cut in September appears certain. Also, one more rate cut is expected in the November or December meeting.

Rising prospects of early rate cuts have weighed heavily on the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines to near 104.35.

Meanwhile, the markets sentiment remains favorable for risk-sensitive assets. S&P 500 futures have posted nominal gains in European trading hours. Going forward, investors will focus on the US Producer Price Index (PPI) data for June, which will be published at 12:30 GMT.

On the Aussie front, investors await four-day China’s third plenum meeting, which is scheduled for next week. China’s Communist Party is expected to take measures to boost the real estate and manufacturing sectors. Being a proxy for China’s economic growth, strong fiscal spending announcements will strengthen the Australian Dollar (AUD). On the contrary, signs of lower fiscal spending than expected will do the opposite.

Economic Indicator

Consumer Price Index ex Food & Energy (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

Author

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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