AUD/USD remains red hot and is trading at 3-week high

• Australian dollar continues to power higher
• RBA inflation expectations remain at 5.2%
• US inflation falls to 3%

The Australian dollar continues to sizzle and has climbed 1.04% on Thursday, after rising 1.56% a day earlier. In the European session, AUD/USD is trading at 0.6857, close to a 3-week high.

Australian inflation expectations remain high

Inflation remains the Reserve Bank of Australia’s number one priority and Thursday’s inflation expectations release vindicated the RBA’s concern that inflation expectations are well anchored. The Melbourne Institute Inflation Expectations for July were unchanged at 5.2% and a notch higher than the consensus estimate of 5.1%. High inflation expectations can translate into inflation rising, which would force the RBA to continue raising interest rates.

RBA Governor Lowe spoke on Wednesday. The speech dealt with RBA policy but any investors looking for insights into rate policy walked away disappointed. Lowe said that the full effects of high rates were yet to be felt and it remained to be seen if more hikes would be required.

US inflation dropped lower than the estimate and that sent the US dollar broadly lower on Wednesday. Headline inflation fell from 4.0% y/y to 3.0%, and critically, the core rate dropped to 4.8%, down from 5.3%. Both readings were lower than the forecast and point to inflation continuing to move in the right direction.

The inflation numbers were good, but likely not good enough to convince the Fed to pause at the July 27th meeting. The Fed is widely expected to raise rates at the July meeting but the positive inflation data has also raised the likelihood of a pause at the September meeting. There is a possibility that the Fed’s rate-tightening cycle is finally over, but that will depend on economic data, particularly employment and inflation reports in the coming months.

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AUD/USD Technical

• AUD/USD put pressure on resistance at 0.6878 earlier. This is followed by resistance at 0.6944
• 0.6772 and 0.6682 are providing support

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