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AUD/USD at 6-Week Low Following Softer Inflation

AUD/USD at 6-Week Low Following Softer Inflation

The Australian dollar fell against its U.S. counterpart as data showed that domestic inflation continued to ease, although at a slower-than-expected rate. The AUD/USD tested the 0.6600 level for the first time in six weeks as slowing inflation supports the case for the Reserve Bank of Australia to continue its rate hike pause. Data caused uncertainty over the RBA’s plans for interest rates to increase before its policy meeting next week.

Interest rates outlook weighs on AUD/USD 

Data from Australian Bureau of Statistics recently showed further easing of inflationary pressures. In the first quarter of 2023, the annual inflation rate in Australia decreased to 7.0%, which is lower than the market’s predicted rate of 6.9%. The drop pushes inflation further away from its 30-year high of 7.8% in the previous quarter, towards its the lowest rate since Q2 of 2022.

On a quarterly basis, the Consumer Price Index (CPI) increased by 1.4%, the lowest since Q4 2021.

AUD/USD,Inflation Market Analysis

Monthly CPI eased to 6.1%, well below the expected rate of 6.6% and down from 6.8% previously.

Due to a notable slowdown in Australian inflation, the Reserve Bank of Australia (RBA) is likely to maintain the current interest rate at 3.60% at its next meeting. Easing inflation in the country supports the central bank’s view that inflation is heading slowly to the target range, which supports pausing further rate hike for the near future. 

In April, the Reserve Bank of Australia kept cash rate unchanged at 3.6%, following ten consecutive rate increase. The board, however, stated that further increases might be required to return inflation to the target range.

The Australian Dollar is biggest loser against the greenback today, down by nearly 0.3%

According to UOB’s strategists, the AUD/USD is forecasted to experience additional downward pressure in the near future as long as the Aussie remains below 0.6670.

USD steady ahead amid mixed sentiment, eyes key data

Concerns about a possible economic slowdown in the United States increased due to disappointing corporate earnings and lower-than-anticipated consumer confidence data. This led to a rise in demand for safe-haven currencies like the dollar, and limited interest in higher-risk assets. On Tuesday, the dollar index increased by more than 0.5%, despite a decrease in U.S. Treasury yields and investor uncertainty regarding additional interest rate hikes by the Federal Reserve.

Next week, the Federal Reserve is likely to increase interest rates by 25 basis points. After this, there is a 68% chance that the bank will pause in June. However, the Fed has not shown any intention to abandon its hawkish stance yet, with some officials have recently called for higher interest rates.

Persistent signs of inflation indicate that the tightening cycle hasn’t come to an end yet. However, markets are currently predicting that US interest rates will peak in June and then decrease to less than 4.5% by the end of the year.

Investors are waiting for the first-quarter GDP data and April consumer sentiment data as well as Personal Consumption Expenditures (PCE) data, Fed’s preferred inflation gauge, for more clues on the state of the economy ahead of Fed’s meeting next week.

Additionally, earnings reports from major US firms are in the spotlight as a major gauge of the overall economic activity.

The US dollar kept its strength against major currencies benefiting from its safe-haven appeal, especially against risk-sensitive currencies like the Australian dollar. Most Asian currencies also were affected negatively due to the possibility of higher U.S. interest rates.

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