AUD/USD bulls pulling away but a correction could be around the corner

AUD/USD remains firmly bid in the US session, but a touch below the impulse highs that were printed following a sell-off in the greenback on the back of the US inflation miss of expectations. AUD/USD shot to a high of 0.7109, extending its climb from the low of 0.6946. 

The pair were stuck in the mud following the Chinese inflation data in the Asian session, hovering around 0.6950 and drifting higher into the European markets in anticipation of the US inflation data, tipped to come in below that of June's super high print.

China's July Consumer Price Index and Producer Price Index inflation came in lower than expected. CPI inflation increased to 2.7% YoY (cons. 2.9%, TD 3.0%, last 2.5%) while PPI inflation fell to 4.2% (TD and cons. 4.9% YoY, last 6.1%).

Indeed, the markets were positioned correctly into the data and the outcome sent the US dollar lower across the board. Risk rallied sharply, and for its high beat qualities, the antipodeans followed suit. 

 Prices rose 8.5% on an annualized basis in July, a slower pace than the 9.1% rise reported in June and below analysts' consensus expectations for an 8.7% rise.  However, it is too soon to claim victory and there is a long way to go until the Federal Reserve's next meeting in September, which means potential speed bumps along the way for the Aussie.

In fact, Federal Reserve's Neel Kashkari has recently crossed the wires and has said that while he is happier to see inflation surprised to the downside, the Fed is far, far, far away from declaring victory on inflation. He added that ''this doesn't change my rate hike path'', and he is expecting 3.9% end of this year 4.4% end of next year.

''The Fed will be looking for "clear and convincing" evidence of inflation turning the corner, and we are not there yet,'' analysts at TD Securities argued. ''An epic collapse across USD pairs. The question is whether this will stick.'' Despite the prospects of peak inflation, the broader sentiment in the markets is for the Fed to maintain its aggressive tightening bias in the months ahead. There are fewer possibilities of a 75bps hike in September, however, with markets in anticipation of a 50bp rate hike instead but the pedal will be to the metal as the Fed aims to reach a more restrictive policy posture before the end of the year.

Aussie CPI and RBA implications 

As for domestic inflation data, we have a long way until the Australian Bureau of Statistics (ABS) will publish a monthly CPI data series in October, likely on 26 October in tandem with the usual quarterly CPI release. Analysts at TD Securities said that they think it is likely that the trimmed mean measure (RBA's preferred core CPI indicator) will also be published alongside the headline CPI but will wait for more details from the information paper on the 16th of August.

''We think the release of a monthly CPI series should give the Reserve Bank of Australia more policy insights on the impact of its aggressive monetary policy tightening on inflation, and in turn greater clarity on the path of this rate hike cycle. From the last MPS, the Bank appears more comfortable about embracing the notion of slowing the pace of rate hikes and moderation in m/m inflation prints should give the Bank the confidence to dial back its hawkish stance.''

In other data that will be key for the Aussie, traders will need to wait for the July employment report on 18 August. However, in the meantime, recent commodity price support for the Aussie has been rather mixed.'Oil has been notably below the pre-Russia invasion of Ukraine levels, but more upbeat are metals prices. Iron ore was been rebounding over the week despite reports that China is downplaying its 2022 economic growth target, as noted by analysts at Westpac explained.