AUD/USD Refreshes Three-Week High at 0.6640 Amid US Inflation and Australian Employment Data Anticipation
The AUD/USD currency pair has surged to a fresh three-week high, reaching 0.6640 during Wednesday’s European session, reflecting a strong performance by the Australian Dollar (AUD) against a weakening US Dollar (USD). As the market gears up for significant economic data releases from the United States and Australia, traders and investors closely monitor the developments that could shape the near-term outlook for both currencies.
US Dollar Weakens Ahead of Crucial Inflation Data
The US Dollar has been downward, allowing the AUD to gain traction. This decline comes ahead of the release of the US Consumer Price Index (CPI) data for July, scheduled for 12:30 GMT. The CPI report is highly anticipated as it will provide fresh insights into the inflationary pressures in the US economy, which in turn will influence the Federal Reserve’s (Fed) monetary policy decisions in the upcoming months.
Current market expectations suggest that the July CPI report will show a modest increase in both headline and core inflation, with monthly gains expected at 0.2%. On an annual basis, headline CPI is projected to have eased slightly to 2.9%, down from the previous reading, while core CPI is estimated to have dipped to 3.2%. These figures, if confirmed, would indicate a gradual deceleration in inflation, aligning with the Fed’s recent statements about the trajectory of price pressures.
The outcome of the CPI data is particularly crucial as it will either reinforce or diminish market speculation about the size of the Fed’s anticipated interest-rate cuts in September. According to the CME FedWatch tool, there is currently a 54.5% probability that the Fed will opt for a 50 basis point (bp) reduction in interest rates at its September meeting. This uncertainty has left traders divided, with some expecting a smaller rate cut if inflation remains relatively high.
AUD/USD Daily Price Chart
Source: TradingView, prepared by Richard Miles
Market Sentiment Remains Cautious
Despite the overall cautious sentiment in the market, there have been some signs of optimism. S&P 500 futures have recorded modest gains during European trading hours, suggesting that investors are not overly pessimistic ahead of the inflation data. However, the US Dollar Index (DXY), which measures the USD against a basket of six major currencies, has continued to slide, falling further below the 102.50 mark. This weakness in the USD has provided a supportive backdrop for the AUD/USD pair.
Additionally, the US Treasury market has seen some movement, with the yield on the 10-year Treasury note dipping to around 3.84%. Lower yields typically reduce the appeal of holding USD-denominated assets, contributing to the greenback’s weakness against other currencies, including the AUD.
Focus Shifts to Australian Employment Data
While the US inflation data is the immediate focus, the Australian Dollar is also being influenced by domestic factors, particularly the upcoming employment data for July, which is set to be released on Thursday. The labor market figures are expected to provide key insights into the health of the Australian economy and will play a significant role in shaping expectations for the Reserve Bank of Australia’s (RBA) future monetary policy decisions.
Economists are forecasting that the Australian labor market will have added 26.5K jobs in July, a slower pace compared to the 50.2K jobs added in June. The Unemployment Rate is expected to remain steady at 4.1%. If the data comes in as expected or shows a stronger-than-anticipated job market, it could bolster the AUD, as it would suggest that the Australian economy remains resilient despite global economic uncertainties.
The employment data will also be critical for the RBA, which has maintained a cautious stance in recent months. The central bank is widely expected to keep its Official Cash Rate (OCR) unchanged at 4.35% for the rest of the year. A strong labor market would likely support this view, reducing the need for further rate cuts. On the other hand, if the employment data disappoints, it could lead to renewed speculation about potential rate cuts later in the year.
Outlook for AUD/USD
The AUD/USD pair’s recent gains are a reflection of the broader market dynamics, with the US Dollar’s weakness and anticipation of critical economic data playing a pivotal role. As the US CPI data looms, the pair could see increased volatility, depending on whether the inflation figures meet, exceed, or fall short of expectations. A stronger-than-expected CPI could revive the USD and put pressure on the AUD/USD pair, while weaker inflation could see the pair extend its gains.
Following the CPI release, attention will quickly shift to the Australian employment data. The outcome of this report will be crucial in determining whether the AUD can sustain its recent strength or if it will face headwinds in the coming days. For now, the market remains in a state of cautious anticipation, with traders ready to react to any surprises from either the US or Australian data.
In conclusion, the AUD/USD pair’s movement towards a three-week high underscores the complex interplay of economic factors on both sides of the Pacific. With significant data releases on the horizon, the pair is poised for potential volatility, making it a key focus for traders and investors in the near term.
