AUD/USD hovers around 0.6650 due to heightened inflation concerns
- AUD/USD receives support as hot inflation data fuel speculation that the RBA may raise rates in August.
- Australia’s Consumer Inflation Expectations rose to 4.4% in June from May’s 4.1%, indicating ongoing cost pressures.
- US GDP Annualized (Q1) is expected to increase 1.4% from the previous growth of 1.3%.
AUD/USD remains stable after gaining in the previous session, trading around 0.6650 during the Asian hours on Thursday. The Australian Dollar (AUD) is supported against the US Dollar (USD) due to heightened inflation concerns, fueling speculation that the Reserve Bank of Australia (RBA) might raise interest rates again in August.
On Thursday, Australia’s Consumer Inflation Expectations rose to 4.4% in June from May’s 4.1%, indicating ongoing cost pressures with inflation still above the RBA’s target range of 2%-3% due to persistently high service costs.
Australia’s monthly Consumer Price Index (CPI) jumped to 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.
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.
On the US Dollar’s (USD) side, traders are anticipating the release of the US Gross Domestic Product Annualized (Q1) data on Thursday, which is expected to show a slight increase of 1.4% from the previous growth of 1.3%. On Friday, the Core PCE Price Index inflation is projected to decrease year-over-year to 2.6% from the previous 2.8%. Market participants are hoping that signs of easing inflation will encourage the Federal Reserve (Fed) to consider rate cuts sooner rather than later.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.