AUD/USD edges lower, CPI next

The Australian dollar is in negative territory on Tuesday. In the European session, AUD/USD is trading at 0.6898, down 0.21%. This follows a two-day rally in AUD/USD climbed over 2%.

Australian CPI looms

It could be a busy week for the Australian dollar, with Australia releasing CPI on Wednesday, followed by the US on Thursday. Australian headline inflation dropped to 6.9% in October, down from 7.3% a month earlier. The markets are bracing for inflation to rise again, with a forecast of 7.3% for December. As well, the trimmed mean rate (core CPI) is also expected to rise to 5.5%, up from 5.3%.

The RBA is widely expected to continue its tightening at the February 7^th meeting. The markets are currently pricing in a 25-basis point hike at 60%, and this will likely rise if inflation reverses directions and climbs higher on Wednesday, as expected. The RBA is well aware of the pain that high rates are causing to consumers and businesses and remains flexible with its rate policy. The minutes of the December meeting indicated that the RBA considered three options at that meeting – a 25 bp hike, a 50-bp hike and a pause. In the end, RBA members opted for the 25-bp increase.

The Fed hasn’t had much success in convincing the markets to adopt its outlook on interest rates. The markets have stubbornly clung to a dovish approach, pricing in a terminal rate of 4.93%. In contrast, the Fed dot plot indicates a terminal rate of 5-5.25%. But you can’t fault the Fed for not trying. On Monday, two non-voting FOMC members reiterated the Fed’s hawkish stance, saying that rates would likely rise above 5%. Atlanta Fed President Rafael Bostic said he expected rates to remain above the 5% level for “a long time” and that he would put rates on hold throughout 2024. Bostic added that if Thursday’s inflation data showed inflation easing, it would strengthen the case for reducing the rate hike at the February meeting to 25 basis points. San Francisco Fed President Mary Daly echoed this stance, saying that holding rates at its peak for 11 months was a “reasonable starting point.”

If inflation is stronger than expected, the markets may listen a bit more closely. Conversely, a soft inflation release will make it harder for the Fed to convince the markets that it is not planning to wind up the current tightening cycle with a “one and done” hike in February.

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AUD/USD Technical

• AUD/USD has support at 0.6703 and 0.6620
• There is resistance at 0.6841 and 0.6969

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