Australian Dollar saw neutral movements, markets gear up for Fed and CPI


  • AUD/USD wades through mixed trading as sellers regain momentum.
  • Focus is now on Wednesday’s US inflation figures and Fed dot plot.
  • Australia releases mixed NAB business survey figures.

On Tuesday, the AUD/USD pair experienced mixed trading, facing some bearish pressure and lingering around the 0.6605 area. This shift occurred as sellers re-entered the market after a minor rebound on Monday. The ongoing Federal Reserve (Fed) two-day meeting, due to conclude on Wednesday, and the US May inflation data release will be the key drivers this week.

On the Australian front, a mixed economic outlook with inflation stubbornly high might prompt the Reserve Bank of Australia (RBA) to delay cuts, which might limit losses for the Aussie.

Daily digest market movers: Aussie is under pressure as traders anticipate CPI and the Fed's decision

  • On the US side, markets await the May Consumer Price Index (CPI) data due to be released on Wednesday.
  • Fed's two-day meeting, which began on Tuesday and will end on Wednesday, has gripped the market's attention. Any fresh clue on their interest rate forecast might trigger volatility in markets.
  • Guidance from an updated dot plot are anticipated as well.
  • NAB’s May business survey shows mixed results for Australia’s outlook as the business confidence dropped to a six-month low of -3 from 1 in April.
  • Business conditions dipped slightly to 6, just below the long-term average while the Employment sub-component showed improvement.
  • These indicators suggest the RBA should remain cautious about easing prematurely.

Technical analysis: AUD/USD maintains support despite retracement

Following recent declines, the Relative Strength Index (RSI) continues to be below 50, supporting the bearish mood, while the Moving Average Convergence Divergence (MACD) prints red bars, reflecting a growing selling pressure.

Nonetheless, the positive outlook remains the same as the pair remains above the 100 and 200-day SMA at approximately 0.6550, suggesting an overall positive trend.

 

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.

 

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