AUD/USD slips on soft Chinese PMIs, Aussie inflation jumps

• RBA’s Lowe says inflation fight not over
• Australian inflation rises to 6.8%
• US Treasury yields fall on debt ceiling deal

Australian inflation rose in the first quarter, but the Australian dollar is considerably lower today due to soft China PMI reports. AUD/USD is trading at 0.6481, down 0.54%. Earlier, AUD/USD dropped as low as 0.6480, its lowest level since November 7th.

Australia’s inflation rises

Reserve Bank of Australia Governor Lowe was on the hot seat earlier today, as he testified before a Senate committee. Lowe defended the Bank’s aggressive tightening, saying he was aware of the financial pain to families but insisted that high rates were necessary. Lowe said it was too early to declare victory over inflation. It’s a good thing he didn’t because his testimony came around the same time as Australian CPI for the first quarter, which surprised to the upside. CPI rose to 6.8%, up from an upwardly revised 6.3% and above the estimate of 6.4%.

With the RBA meeting next week, today’s inflation report could have ramifications on the Bank’s rate decision. The markets have trimmed the odds of a pause to 78%, down from 90% just a day ago, according to ASX RBA Rate Tracker. This means there is an outside chance of a 25-basis point hike, and the RBA could feel compelled to hike again, with inflation remaining stubbornly high.

China PMIs ease lower

China’s services and manufacturing PMIs fell in May, pointing to a rocky recovery from Covid. Services dipped to 54.5, down from 56.4, but beat the estimate of 50.7. Manufacturing dropped from 49.2 to 48.8 and missed the estimate of 49.4. A reading below 50.0 points to contraction. The weak data has weighed on the Australian dollar, which is sensitive to Chinese releases, as China is Australia’s number one trading partner.

In the US, the debt ceiling deal between President Biden and House Speaker McCarthy is expected to pass through Congress. There could be some hurdles, as some Republicans are against the agreement. The markets are optimistic, as 10-year Treasury yields dropped 2.6% on Tuesday in response to the agreement, which was reached on the weekend (US markets were closed on Monday). The 10-year yields are currently at 3.65%, after rising to 3.85% on Friday, their highest level since March.

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AUD/USD Technical

• There is resistance at 0.6559 and 0.6627
• 0.6450 and 0.6382 are providing support

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