Australian dollar drifting ahead of US CPI

The Australian dollar is drifting in the Thursday session. In the European session, AUD/USD is trading at 0.7740, up 0.12% on the day.

Inflation Expectations Climb

On a day that the markets await US inflation numbers, Australian data showed a surge in inflation expectations. MI Inflation Expectations for May rose to 4.4%, up from 3.5% and smashing past the consensus of 3.6%. This was the highest reading in 14 months, and is sure to catch the attention of RBA policymakers. Granted, this does not point to a definite jump in inflation, but inflation expectations can translate into actual inflation figures.

Will we see a taper from RBA?

The Australian recovery has been impressive, so much so that economic conditions have improved more favourably than the RBA had anticipated in its economic forecasts. In an interview with Bloomberg, John Edwards, a former board member at the RBA, said he expects the central bank to taper its QE programme at the July policy meeting.

The current round of bond purchases, which is worth AUD 100 billion, expires in September. The July meeting will be closely watched, as policymakers decide whether to extend the purchases for a third time. If there is a scaling back of QE, the Australian dollar could respond with strong gains.

US inflation up next

In the US, CPI for May will be released later today (12:30 GMT). In April, the 0.8% gain (MoM) caught the markets off guard, and the US dollar responded with strong gains, although they were short-lived. Still, this shows that inflation concerns are very much on the mind of the markets. The consensus stands at a 0.4% gain, so a print of 0.50% or less should allow the markets to return to business as usual. However, a stronger gain could raise speculation about a tightening of policy and lift the US dollar, much as we saw after the April CPI release.

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AUD/USD Technical

• AUD/USD faces resistance at 0.7797. Above, there is resistance at 0.7849
• On the downside, there are support levels at 0.7669 and 0.7593

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-event

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