AUD/USD higher on softer US dollar following CPI data

The AUD/USD pair is higher on the day during the American trading session by about 0.2% after traveling from a low of 0.6778 to reach a high of 0.6818 so far. Risk has bounced again in late Wall Street and that has taken the high beta currencies higher.

The ongoing slowdown in shelter inflation left the market sceptical that the FOMC will raise rates again in June, according to analysts at ANZ Bank. As a result, the market responded favourably to the April CPI figure.

In the US, consumer inflation inched down to 4.9% in April from 5% in March. Inflation in the Core CPI decreased in April from 5.6% in March to 5.5%. Most of the numbers were in line with predictions. At 5.00%-5.25%, the Fed Funds rate is presently higher than the CPI.

The US Dollar dropped at the day’s end as US yields fell. The US Dollar Index (DXY), which compares the value of the dollar to a basket of other currencies, including the Australian dollar, ended the day around 101.40, staying above the critical support level of 101.00. After reversing from close to 4.10%, the US 10-year Treasury yield settled at 3.43% and the 2-year at 3.90%.

On Thursday, figures on consumer confidence and domestic inflation predictions are expected. Traders will also closely monitor April’s Consumer Price Index and Producer Price Index figures for China’s inflation.

The Reserve Bank of Australia reversed its April pause, raising interest rates by 25 basis points in May and keeping the door open for more hikes. Although there is uncertainty as a result, investors believe that the RBA will remain on hold moving forward.

Analysts at Brown Brothers Harriman highlighted that the Federal Reserve relaxing expectations are beginning to be scaled back with regard to the expectations surrounding the Federal Reserve.

At the start of last week, swaps market was pricing in a Fed Funds range between 4.0-4.25% in 12 months.  Earlier, it was as low as 3.5-3.75% but now it’s back in the 3.75-4.0% range in 12 months.  Three cuts by year-end were fully priced in at the start of this week but the odds of a third hike have fallen to around 60% currently, the analysts said.

Market expectations of a Fed pivot are misguided and must be repriced.  Fed officials are likely to continue pushing back against this dovish take but it will really be up to the data.