Aussie dips as Inflation Expectations jump

The Australian dollar has extended its losses today. AUD/USD is trading at 0.6412, down 0.29%.

The US dollar has rebounded after a 3-day slide, which saw the Australian dollar climb over 200 points. The Aussie has coughed up half of those gains since Tuesday, and we could be in for further volatility in today’s North American session, as the US releases the October inflation report. Investors are somewhat confused, thanks to mixed signals from both the Federal Reserve and last week’s US employment report.

The Fed meets next in mid-December, and it’s close to a toss-up as to whether the Fed will raise rates by 0.50% or 0.75%. At the last meeting, at which the Fed hiked by 0.75%, Fed Chair Powell hinted at easing up on rates but also said that the terminal rate would likely be higher than previously expected – this mixed message makes it difficult to peg the Fed as being hawkish or dovish.

US inflation expected to remain hot

Last week’s employment report was mixed, as unemployment and wage growth climbed, while nonfarm payrolls fell but still exceeded expectations. This makes today’s inflation report all the more important for the Fed ahead of the December meeting. A hot inflation report would likely boost the likelihood of a 0.75% hike, which would be bullish for the US dollar. CPI is expected to dip to 8.0%, down from 8.2%, which although a slight improvement, would indicate that inflation remains very high.

Australia is also dealing with high inflation, and Melbourne Institute Inflation Expectations for October reinforced concerns that inflation is yet to peak. Inflation Expectations rose to 6.0%, up sharply from 5.4% in September, and the first acceleration in four months. The economy is showing signs of slowing down, and a report from the National Australian Bank on Wednesday projected that GDP would fall to 0.8% in 2023 and interest rates would peak at 3.6% next year. The cash rate is currently at 2.85%, which means that the RBA is likely to continue raising rates into 2003.

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AUD/USD Technical

• AUD/USD is testing resistance at 0.6411. Above, there is resistance at 0.6549
• There is support at 0.6239 and 0.6196

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