Aussie slips, US inflation jumps

The Australian dollar has recorded losses on Wednesday. In the North American session, AUD/USD is trading at 0.7804, down 0.46% on the day.

AUD/USD posted strong gains last week and appeared poised to break above the 79 line on Monday. However, the pair has headed lower, and is struggling to stay above the 78 level on Wednesday.

US inflation higher than expected

US inflation for April was much higher than expected. Headline CPI rose 0.8% (MoM), crushing the estimate of 0.2%. It was a similar story for Core CPI, as the gain of 0.9% easily exceeded the forecast of 0.3%. The headline reading was the highest since 2009 and the core read was even more impressive, with its highest reading since 1982.

On an annual basis, the inflation numbers were dramatic. CPI jumped to 4.2%, while the core CPI measure rose 3.o%. However, it needs to be noted that these figures are inflated since the comparison is with CPI data during the Covid pandemic. Even so, the April figures will likely lead to calls for the Fed to re-examine policy.

Fed Chair Powell has insisted that inflationary pressures due to the economic recovery are only transitory, but this view has been challenged. Fed member Robert Kaplan recently urged the Fed to talk about tapering QE earlier rather than later, and this inflation report will provide ammunition to his stance and could attract other Fed members.

Will the Fed acknowledge that it needs to re-evaluate its monetary policy? If policymakers even hint that that is an option, it could have a significant effect on the financial markets and the US dollar.

Australia will release the MI Inflation Expectations for April early on Thursday (1:00 GMT). In March, inflation expectations came in at 3.2% and this is expected to rise to 3.6%.

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AUD/USD Technical

• AUD/USD faces resistance at 0.7912 and 0.7981
• On the downside, there are support levels at 0.7725 and 0.7607

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