Overview
The AUD/USD currency pair is currently coiling beneath the 0.7000 level as traders await the release of the US Consumer Price Index (CPI) report. The relationship between the Australian dollar and US front-end yields has strengthened, indicating a potential for a breakout depending on the CPI results.
US Inflation and Fed Pricing in Focus
The core US CPI is anticipated to rise by 0.2% in September, a decrease from 0.3% in August. This subdued expectation contrasts with rising inflationary pressures in energy and producer prices, raising questions about the sustainability of this trend. Traders are particularly focused on whether the CPI will be strong enough to revive rate hike expectations from the Federal Reserve or weak enough to further diminish hawkish pricing for future meetings.
What's Driving the Aussie Ahead of CPI?
Recent movements in AUD/USD have shown a notable correlation with US two-year Treasury yields, reaching +0.81 over the past five sessions. This is a significant increase compared to previous periods, suggesting that the Aussie is responding more closely to US yield movements. Additionally, the AUD has maintained an inverse relationship with the US Dollar Index and has been closely aligned with precious and industrial metals, reinforcing its status as a high-beta commodity currency.
Historical Performance on CPI Days
Historically, the AUD has shown mixed results on US CPI release days. Between 2016 and 2019, the Aussie rose on approximately 69% of these days, but this figure has dropped to around 56% since 2023, indicating increased uncertainty in market reactions to inflation data.
A Breakout Approaching?
On the four-hour chart, AUD/USD has been trading within a contracting range, with resistance just below 0.7000. The price is currently testing a downtrend resistance that has previously stalled rallies. A sustained break above this resistance could lead to further gains, targeting levels around 0.7040 and beyond. Conversely, if the price reverses, initial support levels to watch include 0.6950 and 0.6938.
Momentum indicators suggest a slight preference for long positions, but the overall market sentiment remains cautious ahead of the CPI report, which is viewed as a binary risk event.