AUD/USD unchanged ahead of US CPI

The Australian dollar is unchanged on Tuesday, after starting the week with strong gains. In the European session, AUD/USD is trading at 0.6966.

Australia’s Business Confidence jumps

Australia’s NAB Business Confidence rebounded in January, rising from 0 to 6 and above the forecast of 1 point. Business Conditions rose to 18, up from 13 and higher than the forecast of 8 points. This follows three months of softening in late 2022. The NAB noted that firms are more optimistic about global growth and the jump in business conditions is a sign that the economy is more resilient than previously expected. The positive news failed to send the Aussie higher, as the markets are waiting for today’s US inflation report.

Reserve Bank of Australia Governor Lowe will be on the hot seat when he appears before parliamentary committees on Wednesday and Friday. Inflation rose to 7.8% in December, its highest level since 1990. The RBA has hiked rates by some 325 basis points in 10 months, yet inflation isn’t showing signs of peaking.

The RBA raised rates by 25 bp last week and Lowe has signalled that more increases will be needed to tame inflation. Inflation isn’t expected to fall to the RBA’s target of 2% to 3% until 2025. Lowe has faced a barrage of criticism in his handling of inflation and interest rate policy and it’s far from certain that he will be reappointed for another term. Lowe is likely to face a grilling from the committee members, who may be thinking that “something isn’t working here”.

All eyes on US inflation

The US releases January inflation later today. Inflation is projected to fall to 6.2%, down from 6.5%, but there is unease in the markets that headline inflation might be stronger than expected. The sizzling jobs report indicated that the US labour market remains strong and January has seen higher energy and used car prices. The markets aren’t as confident that the Fed will cut rates late in the year and if the inflation report is higher than expected, the markets could fully price in two more rate hikes. This would be a major shift towards the Fed stance, as Jerome Powell has been saying for months that the pace of rate hikes will likely be higher and longer than previously expected.

Recent inflation reports have overestimated inflation and the US dollar has responded with sharp losses. Today’s inflation report will likely follow that pattern, and if inflation is weaker than expected, the dollar should lose ground. Conversely, the dollar should get a boost if inflation is higher than expected.

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AUD/USD Technical

• 0.6962 is a weak resistance line, followed by 0.7080
• 0.6841 and 0.6761 are providing support

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