Australian dollar rises after CPI falls

The Australian dollar has rebounded on Wednesday. In the European session, AUD/USD is trading at 0.6705, up 0.28%.

Australian CPI eases to 4.3%

Australia’s CPI for November rose 4.3% y/y, down considerably from 4.9% in October and just shy of the market estimate of 4.4%. This marked the lowest reading since January 2022. A key measure of core inflation, the trimmed mean, climbed 4.6% compared to 5.3% in November.

The data indicates that the battle against inflation is moving in the right direction but more work needs to be done to achieve the inflation target of 2%. The markets are confident that the Reserve Bank of Australia is done with its rate-tightening cycle. The RBA has raised rates only once since June and policy makers are hoping that inflation continues to drop without further rate increases.

The RBA doesn’t meet until February 6 and is widely expected to hold rates at 4.35%. Investors have priced in a quarter-point cut in September, but that could change if there are any surprises from the fourth-quarter inflation report which comes out on January 31. If inflation is lower than expected, it would put pressure on the RBA to start cutting rates, perhaps as early as June.

The Australian dollar sparkled in the last two months of 2023, jumping 7% against the US dollar. The Aussie has hit a rough patch in January, falling 1.5%. The US dollar has looked sharp against the major currencies early in 2024, despite the Fed acknowledging that it expects to lower rates this year. Last week’s nonfarm payroll report was stronger than expected, providing support for the Fed to maintain rates in restrictive territory until inflation falls closer to the 2% target. This stance was reiterated by Atlanta Fed President Bostic on Monday, who said he has a “natural bias to be tighter” and that he anticipated two rate cuts by the end of the year, with an initial one in the third quarter.

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AUD/USD Technical

• AUD/USD is testing resistance at 0.6700. Above, there is resistance at 0.6722
• There is support at 0.6664 and 0.6642

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