Australian dollar steady as US inflation falls to 4.9%

• US inflation ticks lower to 4.9%
• Australia releases inflation expectations later today

US inflation dips lower

The US inflation report for April showed a drop in CPI, but the decline was marginal. Headline CPI ticked lower to 4.9%, down from 5.0% in March and the consensus estimate of 5.0%.  The core rate eased to 5.5%, matching the consensus estimate and a drop below the March reading of 5.6%. On a monthly basis, headline CPI rose from 0.1% to 0.4%, matching the consensus estimate. The core rate was unchanged and also matched the consensus estimate.

The takeaway from the inflation report is that inflation remains stubbornly high and the disinflation process is moving at a snail’s pace. The Fed has managed to curb inflation significantly, but it seems that bringing inflation down to the 2% target will be the harder part, and one or two more rate hikes will not achieve that target.

The markets repriced the odds of a Fed pause in June to 87% after the inflation release, up from 78% a day earlier. Fed Chair Powell has hinted at a pause in rates in order to assess the effect of higher rates but also poured cold water on expectations of a rate cut anytime soon. The markets disagree, and have priced in a rate cut in September at 70%.

Australia releases consumer inflation expectations later today. We’ve seen a steady decrease in this release, which dropped to 4.6% in April. However, the markets are braced for an upswing to 5.0% in May. The Reserve Bank of Australia will be watching carefully as an increase in inflation expectations can manifest into higher inflation. The RBA has kept the door open for further rate hikes and an increase in inflation expectations would raise the odds of another hike at the June meeting.

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AUD/USD Technical

• AUD/USD is testing support at 0.6756. Below, there is support at 0.6665
• 0.6855 and 0.6952 are the next resistance lines

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