Australian Dollar gains ground as higher inflation dews the RBA’s possible rate cuts

• The Australian Dollar appreciates as higher consumer inflation dampens the possibility of RBA’s rate cuts.
• Australia’s monthly CPI jumped by 4.0% YoY against the expected growth of 3.8% in May.
• The US Dollar remains calm as investors turn cautious ahead of key US economic data releases later this week.

The Australian Dollar (AUD) gains ground after releasing May’s higher-than-expected Monthly Consumer Price Index (CPI). The persistently high inflation is a roadblock to the Reserve Bank of Australia’s (RBA) possible rate cuts, potentially supporting the Aussie Dollar and underpinning the AUD/USD pair.

Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent stated on Wednesday that recent data emphasize the necessity of remaining vigilant about potential inflation increases. Kent noted that current policies are contributing to slower demand growth and lower inflation. He also mentioned that no options regarding future interest rate adjustments are being excluded, per Bloomberg.

The US Dollar remains calm after posting gains on Tuesday. Investors turn cautious ahead of key US economic data releases later this week. The revised US Gross Domestic Product (GDP) for the first quarter (Q1) is scheduled to be released on Thursday, followed by the Personal Consumption Expenditure (PCE) Price Index on Friday.

Daily Digest Market Movers: Australian Dollar edges higher due to higher consumer inflation

• Australia’s monthly Consumer Price Index (CPI) jumped by 4.0% in the year to May, up from the 3.6% increase recorded in April, according to data published by the Australian Bureau of Statistics (ABS) on Wednesday. This increase exceeded the market forecast, which predicted a 3.8% growth for the reported period.
• Reuters cited Fed Governor Michelle Bowman repeating her view on Tuesday that holding the policy rate steady for some time will likely be enough to bring inflation under control. Meanwhile, Fed Governor Lisa Cook said it would be appropriate to cut interest rates “at some point” given significant progress on inflation and a gradual cooling of the labor market, though remained vague about the timing of the easing.
• According to Bloomberg, China Premier Li Qiang expressed confidence in China’s ability to achieve its full-year growth target of around 5%. On Tuesday, the People’s Bank of China injected 300 billion yuan through seven-day reverse repos, keeping the reverse repo rate at 1.8%. Changes in the Chinese economy could significantly impact the Australian market, given the close trade relationship between China and Australia.
• Australia’s Westpac Consumer Confidence rose by 1.7% month-over-month in June, rebounding from a 0.3% decline the previous month. This marks the first increase in four months and the highest level since February.
• On Friday, the US Composite PMI for June surpassed expectations, rising to 54.6 from May’s reading of 54.5. This figure marked the highest level since April 2022. The Manufacturing PMI increased to a reading of 51.7 from a 51.3 figure, exceeding the forecast of 51.0. Similarly, the Services PMI rose to 55.1 from 54.8 in May, beating the consensus estimate of 53.7.
• The RBA Governor Michele Bullock said during her latest press conference that the Board discussed potential rate hikes, dismissing considerations of rate cuts in the near term, as per ABC News. Markets have significantly reduced their expectations for a RBA’s rate cut this year, with an easing not anticipated until April next year.

Technical Analysis: Australian Dollar holds a position around 0.6650

The Australian Dollar trades around 0.6660 on Wednesday. Analysis of the daily chart shows a neutral bias for the AUD/USD pair as it consolidates within a rectangle formation. The 14-day Relative Strength Index (RSI) is positioned slightly above the 50 level. Further movement may indicate a clear directional trend.

The AUD/USD pair may find support around the 50-day Exponential Moving Average (EMA) at 0.6616. A break below this level could lead the pair to test the lower boundary of the rectangle formation near 0.6585.

On the upside, the AUD/USD pair may encounter resistance near the upper boundary of the rectangle formation around 0.6695, aligned with the psychological level of 0.6700. Beyond that, potential resistance levels include the high of 0.6714 observed since January.

AUD/USD: Daily Chart