Aussie at 6-mth high, inflation expectations tick lower

The US dollar is showing broad weakness against the major currencies and the Australian dollar is taking full advantage. AUD/USD has jumped 1.51% in July and the Aussie is at its highest level since January 3. In the North American session, AUD/USD is trading at 0.6741, up 0.32% on the day at the time of writing.

Australian inflation expectations dips to 4.3%

Australia’s inflation expectations surprised on the downside, dipping to 4.3% in July. This was a notch lower than the 4.4% gain in June and below the market forecast of 4.5%. Still, inflation expectations are much too high for the Reserve Bank of Australia’s liking, which has an inflation target band of between 2 and 3%.

Inflation expectations is carefully monitored as it is considered a predictor of consumer price inflation. The Reserve Bank of Australia has warned that the inflation road will be bumpy and the May CPI surprised by rising from 3.6% to 4.0%, above the market estimate of 3.8% and its highest level this year.

The RBA is in a hawkish mood and discussed hiking interest rates at the previous two meetings, although policy makers decided to hold rates at 4.35% at both meetings. The central bank remains concerned about high inflation, particularly services inflation which gained 4.3% in the first quarter. I don’t expect the RBA to hike rates at the August 6 meeting but the Bank’s hawkish tone means that investors shouldn’t expect an initial rate cut anytime soon.

US CPI falls to 3.0%

US CPI rose 3.0% y/y in June, down from 3.3% a month prior and below the market estimate of 3.1%. This was the lowest inflation reading since June 2023. Monthly, CPI declined 0.1%, down from zero in May and lower than the market estimate of 0.1%. This marked the first decline since May 2020. Core inflation was also lower in June and market expectations for a rate cut in September continue to climb and have hit 81%, according to the CME’s FedWatch.
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AUD/USD Technical

• AUD/USD tested resistance at 0.6791 earlier. Above, there is resistance at 0.6832
• 0.6712 and 0.6671 are the next support levels

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