AUD/USD – Aussie Dips Despite Solid CPI, Fed Statement Next

The Australian dollar has posted losses on Wednesday, erasing the gains from the Tuesday session. In the North American session, AUD/USD is trading slightly above the 0.7470. On the release front, Australian CPI posted a gain of 0.4%, matching the forecast. In the US, economic indicators were dismal. Core Durable Goods Orders and Durable Goods Orders both posted declines. As well, Pending Homes Sales posted a small gain of 0.2%, well below expectations. Later in the day, the Federal Reserve will conclude its meeting and issue a policy statement. On Thursday, the US will release Unemployment Claims.

Australia released a highly-anticipated CPI reading for the second quarter on Wednesday. The index rebounded nicely, posting a gain of 0.4%, compared to a decline of 0.2% in the first quarter. It’s not clear how the RBA, which will set interest rates next week, will respond to the CPI release. The markets have priced in a 50% chance that the bank will lower rates, and an unexpected CPI reading could have swayed the odds of a rate cut. However, the reading matched the forecast, so the question of whether the RBA will act remains up in the air. The annual inflation rate stands at just 1.0%, well below the RBA’s stated target of 2% to 3%. Will this be enough of a factor to prod the RBA into action? We’ll have to wait and see. Many economists see interest rates steadily declining, with Capital Economics chief analyst Paul Dales projecting that rates could drop as low as 1%.

US numbers have been solid in recent weeks, so dismal durable goods reports caught the markets by surprise. Core Durable Goods Orders came in at -0.5%, well short of the forecast of 0.3%. There was no relief from Durable Goods Orders, which posted a sharp gain of 4.0%, compared to a forecast of -1.1%. This marked the weakest reading of 2016. On the housing front, Pending Home Sales gained 0.2%, well short of the estimate of 1.9%.

The Federal Reserve will take center stage on Wednesday. The Fed is not expected to raise the current benchmark rate of 0.25%, so the markets will be paying close attention to the policy statement, looking for clues about a possible hike later in the year. The markets have priced in a 51% chance of a rate hike before the end of the year, but that could quickly dip if the Fed sends a dovish message to the markets. The previous policy statement preceded the Brexit vote by just a week, so it will be interesting to see what Fed policymakers have to say about the British decision to leave the European Union. Solid US numbers in the past few weeks has fueled speculation about a possible rate hike, although it’s extremely unlikely the Fed will make a move at the Wednesday meeting. Although the US economy is in good shape, the fly in the ointment is inflation, which remains stuck at low levels, well short of the Fed’s target of around 2 percent. Fed policymakers will be hesitant to raise rates if inflation is not projected to point upwards.

AUD/USD Fundamentals

Tuesday (July 26)

• 21:30 Australian CPI. Estimate 0.4%. Actual 0.4%
• 21:30 Australian Trimmed Mean CPI. Estimate 0.4%. Actual 0.5%

Wednesday (July 27)

• 8:30 US Core Durable Goods Orders. Estimate 0.3%. Actual -0.5%
• 8:30 US Durable Goods Orders. Estimate -1.1%. Actual -4.0%
• 10:00 US Pending Home Sales .Estimate 1.9%
• 10:30 US Crude Oil Inventories. Estimate -2.1M
• 14:00 US FOMC Statement
• 14:00 US Federal Funds Rate. Estimate <0.50%
• 21:30 Australian Import Prices. Estimate 1.6%

Upcoming Key Events

Thursday (July 28)

• 8:30 US Unemployment Claims. Estimate 261K

*Key releases are highlighted in bold

*All release times are EDT

AUD/USD for Wednesday, July 27, 2016

AUD/USD July 27 at 10:45 EDT

Open: 0.7514 High: 0.7562 Low: 0.7455 Close: 0.7468

AUD/USD Technical

• AUD/USD was choppy in the Asian session. The pair posted slight losses in European trade and is unchanged early in the North American session
• 0.7440 is under strong pressure in support
• 0.7560 is has strengthened in resistance following gains by AUD/USD on Wednesday
• Current range: 0.7440 to 0.7560

Further levels in both directions:

• Below: 0.7440, 0.7339, 0.7251 and 0.7105
• Above: 0.7560, 0.7701 and 0.7835

OANDA’s Open Positions Ratio

AUD/USD ratio has shown movement towards long positions. Currently, long positions retain a majority (58%), indicative of trader bias towards AUD/USD reversing directions and moving higher.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.