AUD/USD rebounds on stronger inflation release

• Australian MI Inflation gauge jumps 0.8%
• AUD/USD climbs 0.80%
• RBA expected to pause rates on Tuesday

The Australian dollar has started the week with strong gains. In the European session, AUD/USD is trading at 0.6708, up 0.91%. The Aussie has rebounded after falling 1.25% last week.

RBA expected to pause rates

The Reserve Bank of Australia meets on Tuesday and is expected to maintain the cash rate at 4.10%. The past two rate meetings have been close calls and that could be the case at Tuesday’s meeting. The money markets, however, are squarely leaning towards a pause, with only a 14% chance of a hike, according to the ASX RBA Rate Tracker.

Investors are basing expectations for a second straight pause on lower inflation and weaker retail sales. Both headline and core CPI eased in the second quarter, as inflation appears to be heading in the right direction. Retail sales surprised on the downside with a -0.8% reading in June, erasing the 0.8% gain in May and missing the consensus estimate of 0.0%.

The RBA could surprise the markets with a hike, as inflation has fallen to 6% but is double the RBA’s upper band of its 1%-3% range. As well, the labour market remains tight and the central bank is concerned that could lead to higher wages which means an increase in inflation. Tuesday’s meeting will be the second to last for Governor Lowe, who may want to deliver another hike or two before his watch ends, in a bid to push inflation closer to the RBA’s target. The RBA will release updated economic forecasts at the meeting, and investors will be especially interested in the inflation projections.

The Melbourne Institute Inflation Gauge jumped 0.8% in July, rebounding from 0.1% in June and beating the consensus estimate of 0.5%. The upswing was somewhat surprising given last week’s inflation report which showed a significant slowdown in inflation. The Australian dollar has moved sharply higher following the release.

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AUD/USD Technical

• AUD/USD is testing resistance at 0.6697. Above, there is resistance at 0.6771
• 0.6573 and 0.6499 is providing support

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