Australian dollar edges lower ahead of CPI

The Australian dollar has edged lower on Tuesday. AUD/USD is trading at 0.6535 in the North American session, down 0.21% on the day.

Australian CPI expected to rise to 3.8%

Australia will release second-quarter CPI early Wednesday, with expectations that inflation is moving the wrong way. The market estimate for headline inflation stands at 3.8% y/y, compared to 3.6% in the first quarter. A key core rate measure, trimmed mean inflation, is expected to hold steady at 4.0%. The Reserve Bank of Australia’s target range for inflation is 1-3% and if CPI is higher than expected, the central bank may have to resort to rate hikes to push stubborn inflation lower.

The RBA will also be keeping a close on Wednesday’s retail sales report. The market estimate for June stands at 0.2% m/m, versus the impressive May reading of 0.6%. Weak consumer spending could spell trouble for the RBA, as a rate hike in order to quell inflation could tip the cooling economy into recession.

Tomorrow’s inflation and retail sales reports are the final tier-1 releases prior to the RBA’s meeting on August 5-6 and will be crucial factors in the rate decision. The money markets have priced in a rate hike at the meeting at around 25%.

Will Fed signal a September cut?

Following the BoJ policy meeting, the Federal Reserve meets later o n Wednesday. Unlike the BoJ meeting, there won’t be any drama around rates, as the Fed is virtually certain to hold the benchmark rate of 5.25%-5.5%, where it has hovered since July 2023.

Investors will be monitoring the rate statement and Fed Chair Powell’s follow-up rate statement. Will we see a signal of a September cut? The markets have priced in a quarter-point cut at 89% and a half-point cut at 10% according to CME’s FedWatch. Any hint of a rate cut in September could have a significant impact on the movement of the US dollar.

AUD/USD Technical

• AUD/USD is testing support at 0.6528. Below, there is support at 0.6508
• There is resistance at 0.6548 and 0.6568

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