AUD/USD bulls move in as US Dollar softens on US CPI

AUD/USD is higher on the day by some 0.2% after traveling from a low of 0.6778 to reach a high of 0.6818 so far. Risk has bounced again in late Wall Street and that has taken the high beta currencies higher. 

´´Markets reacted positively to the April CPI report, as the continued moderation in shelter inflation left the market unconvinced the FOMC will raise rates again in June,´´ analysts at ANZ Bank explained.

Consumer inflation in the US measured by the Consumer Price Index (CPI) ticked lower in April to 4.9% from 5% in March. The Core CPI slowed down from 5.6% in March to 5.5% in April. Numbers came mostly in line with expectations. The Fed Funds rate at 5.00%-5.25% is now above the annual CPI.

The US Dollar ended the day lower amid lower US yields. The US Dollar Index (DXY), which measures the greenback vs. a basket of currencies, including the Aussie, ended around 101.40, as it remains above the key support of 101.00. The US 10-year Treasury yield settled at 3.43% and the 2-year at 3.90%, after reversing from near 4.10%.

Looking ahead, domestic inflation expectations and Consumer Confidence data are due on Thursday. Traders will also pay close attention to Chinese inflation numbers (Consumer Price Index and Producer Price Index for April).

In regard to the Reserve Bank of Australia, the central bank reversed its April pause, hiking by 25 bps in May and leaving the door open to further increases. This makes for uncertainty but markets are generally of the mind that the RBA will be on hold from here.

With respect to the expectations surrounding the Federal Reserve,  analysts at Brown Brothers Harriman noted that the ´´Federal Reserve easing expectations are starting to get pared back.´´

´´At the start of last week, swaps market was pricing in a Fed Funds range between 4.0-4.25% in 12 months.  Earlier, it was as low as 3.5-3.75% but now it's back in the 3.75-4.0% range in 12 months.  Three cuts by year-end were fully priced in at the start of this week but the odds of a third hike have fallen to around 60% currently,´´ the analysts said. 

´´That said, market expectations of a Fed pivot are misguided and must be repriced.  Fed officials are likely to continue pushing back against this dovish take but it will really be up to the data.´´