Australian dollar rises to 2-month high

The Australian dollar has extended its gains today, after rising sharply on Wednesday. In the European session, AUD/USD is trading at 0.7099, up 0.26% on the day.

Aussie rockets on US inflation

Spectacular. That says it all about the Australian dollar’s surge on Wednesday. AUD/USD jumped 150 points and briefly punched above the 0.7100 level for the first time since June 10th. The catalyst for the Aussie’s good fortune was the US inflation report, as July inflation fell and took the US dollar on a nasty tumble against the majors.

The US headline and core inflation releases both came in lower than the forecast.  Core CPI remained steady at 5.9%, lower than the forecast of 6.1%. However, the real news was the headline reading, which dropped to 8.5%, down sharply from 9.1% in June and below the estimate of 8.7%. The markets jumped all over the report, and “inflation peak fever” is spreading, as hopes rise that inflation is finally receding. This sentiment sent the US dollar reeling, on the assumption that the Fed can breathe easier and ease its hiking – perhaps “only” a 0.50% hike after back-to-back increases of 0.75%.

Before investors celebrate the demise of inflation, an examination of the facts is in order. The inflation rate of 8.5%, although lower than last month, is still close to a four-decade high. Inflation fell chiefly due to a drop in gas prices, but with the volatility we are seeing in the oil markets, gasoline could quickly change directions. Perhaps most importantly, inflation remains broad-based; the core reading, which excludes food and energy costs, remained steady at 5.9%. As the Fed has been warning, the fight against inflation remains far from over, and the rate tightening cycle has by no means run its course.

The Reserve Bank of Australia is also in a tough fight against inflation, and is no doubt pleased with today’s MI Inflation Expectations release for July. Inflation Expectations fell to 5.9%, down from 6.3% in June, marking a second straight deceleration. This will likely result in a decline in the forward guidance from the RBA, which would likely weigh on the Australian dollar. The RBA holds its next rate meeting on September 6th.

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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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