Aussie rally takes breather

In the European session, the Australian dollar is trading at 0.6991, up 0.10% on the day. This follows massive gains on Monday, when AUD/USD soared 1.04% and briefly pushed above the symbolic 70 level.

The US dollar’s recent rally has fizzled, but don’t count Uncle Sam out. US Treasury yields have been dropping, which is indicative of investor demand for safety. There is plenty of uncertainty in the air about the US economy, and heated debates about whether the economy is in a recession or not are not contributing to greater confidence in the economic outlook.

Markets eye US inflation report

Wednesday’s US inflation report could have a strong impact on the currency markets. Headline CPI is expected to fall to 8.7%, down from 9.1%, while core CPI is forecast to rise to 6.1%, up from 5.9%. If the headline reading is higher than expected, it will boost the case for the Fed to raise rates by 0.75% in September and the dollar should respond with gains. Conversely, a soft reading from the headline or core releases would ease the pressure on the Fed and could send the dollar lower.

In Australia, confidence releases were a mix. Westpac Consumer Sentiment for August posted a second straight decline of 3%. Consumer confidence has dropped for nine consecutive months, declining some 22.9% during that time. There was better news from the NAB Business Confidence index for July, which jumped to 7, up from 2 points. Business Conditions climbed to 20, up from 13 prior. The indicator points to broad-based strength in business conditions, despite the global slowdown and weaker domestic activity due to higher rates. As well, purchase and labour costs and retail prices rose, which points to higher inflation and another hike from the RBA in September, likely of 0.50%.

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AUD/USD Technical

• There is weak resistance at 0.7016, followed by resistance at 0.7120.
• 0.6943 has switched to support. Below, there is support at 0.6839

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