Australian dollar dips as inflation misses

The Australian dollar is down slightly in the Wednesday session. In the North American session, AUD/USD is trading at 0.7747, down 0.27% on the day.

Australian inflation weaker than consensus

Australian CPI posted a gain of 0.6% in the first quarter of the year, down from 0.9% in Q4 of 2020. The read was certainly respectable, but underperformed, as the estimate stood at 0.9%. Trimmed CPI, which excludes the most volatile items, dropped from 0.4% to 0.3% and missed the forecast of 0.5%. The weak readings have sent the Australian dollar lower.

The lower than expected inflation numbers will lessen any pressure that was on the RBA to tighten policy due to stronger economic conditions. Australia has extricated itself in admirable fashion from the downturn due to Covid, although the vaccine rollout has been sluggish.

The RBA has been cautious and says that it does not expect GDP or employment to reach pre-pandemic levels until later in the year. Once the economy reaches that level, there is a good chance that the RBA could tighten policy, such as easing QE, as we saw with the Bank of Canada earlier this month.

What can we expect from the FOMC meeting later today (18:00 GMT)? Expectations for a dramatic announcement are low, as the Fed does not appear in any hurry to tighten policy, even with a rapidly improving US economy.

The market seems to have bought into the Fed’s message that even though inflationary pressures are growing, QE will not be reduced for a while yet. In follow-up comments to today’s meeting, Fed Chair Powell is likely to wax positive about the economy but simultaneously state that the economy is still in recovery mood and needs the Fed to keep its foot on the pedal.

Unless the Fed surprises with a more hawkish rate statement than expected, it should be “business as usual” after the meeting, which means that the US dollar could find itself under pressure from the major currencies.

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AUD/USD Technical

• On the upside, 0.7813 has some breathing room in resistance as AUD has lost ground. Above, there is resistance at 0.7887
• On the downside, there are support levels at 0.7688 and 0.7627

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