The AUD/USD pair is strengthening on Wednesday, trading around 0.6500, up 0.45% on the day. This rally is primarily driven by Australia’s new “complete” monthly inflation measure, which surprised to the upside. The Australian Bureau of Statistics (ABS) reported that the Consumer Price Index (CPI) accelerated to 3.8% year-on-year in October, exceeding market expectations of 3.6% and September’s 3.5%. This stronger reading underscores persistent price pressures, likely keeping the Reserve Bank of Australia (RBA) cautious before its December policy decision.
RBA Stance and Inflation Outlook:
- No Urgency for Easing: RBA officials have recently highlighted healthy, albeit slightly softened, labor market conditions, which reduces the immediate need for monetary easing.
- “Hold” Bias: Minutes from the November meeting confirmed the RBA’s preference to maintain the cash rate at 3.6% for an extended period if inflation remains above its 2%-3% target.
- Caution on Monthly Data: Assistant Governor Sarah Hunter warned against overreacting to single monthly inflation readings, noting their potential volatility.
US Dollar Weakness Driven by Decelerating US Economy:
- DXY Under Pressure: The US Dollar (USD) continues to struggle, with the US Dollar Index (DXY) holding near 99.80 after modest declines. This is mainly due to growing expectations of a Federal Reserve (Fed) rate cut in December.
- Increased Rate Cut Odds: The CME FedWatch tool now shows an over 84% chance of a 25-basis-point Fed rate cut, a significant jump from 50% just a week ago.
- Softening US Data:
- September Producer Price Index (PPI) data indicated easing core inflation.
- Consumer spending is cooling, with Retail Sales rising only 0.2% month-over-month.
- Consumer sentiment sharply deteriorated, as the Conference Board’s Consumer Confidence Index dropped to 88.7 in November.
- Fed Officials Hint at Easing: Several Fed officials, including Governor Christopher Waller, New York Fed President John Williams, and Governor Stephen Miran, have signaled that a weakening labor market and softer underlying inflation might justify near-term rate cuts, with Miran explicitly stating support for a decisive December reduction.
AUD/USD Short-Term Outlook:
Given the backdrop of persistent inflation in Australia and increasing signs of economic slowdown in the United States, the Australian Dollar maintains a short-term bullish bias against the US Dollar. Shifts in monetary policy expectations from both central banks are expected to remain the primary drivers for AUD/USD in the coming days, as markets focus on upcoming US macroeconomic data.
