Australian dollar under pressure as inflation rises

The Australian dollar has edged lower on Wednesday. AUD/USD is trading at 0.6525 in the North American session, down 0.14% on the day. Earlier, the Aussie dropped as much as 0.9% and fell to a low of 0.6479 before recovering.

Australian CPI climbs to 3.8%

There were concerns that Australia’s inflation was moving the wrong way and those worries were justified after the CPI release today. In the second quarter, CPI rose 3.8% yoy, up from 3.6% in the first quarter. Notably, it was the first acceleration in inflation since Q4 of 2022. Services and goods inflation both increased, as inflation accelerated across a host of components, including clothing, transport and housing. On a quarterly basis, CPI remained steady at 1%, in line with expectations.

The good news was that the trimmed mean, a key core inflation indicator, eased in the second quarter from 4.0% y/y to 3.9%. The trimmed mean has been on a downtrend but remains well above the upper band of the 1-3% target range.

What will the inflation release mean for the Reserve Bank of Australia, which meets next week? The RBA has said that a rate hike remains on the table and the rise in headline inflation supports the case for a hike. Still, inflation has been on a zig-zag and Bank policy members might want to stall on a hike and hope for better inflation news later in the year. Next week’s meeting is live and the rate decision could remain up in the air right until the rate announcement.

Fed expected to stay on sidelines

The Federal Reserve will announce its rate decision later today. It’s virtually certain that the Fed will maintain rates for a seventh straight time. There’s little drama ahead of the decision but the rate statement and Jerome Powell’s follow-up press conference could signal a rate cut in September, which the market has expected for weeks. Fed Chair Powell and his colleagues have hinted at a rate cut in the next few months but have been purposely vague about the timing. Will that change at today’s meeting?

AUD/USD Technical

• AUD/USD put strong pressure on support at 0.6473 before reversing directions. The round number of 0.6400 is next support level
• There is resistance at 0.6588 and 0.6661

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