AUD/USD Holds Near a 10-Week High Before Australia’s July Inflation Report

Key Takeaways

• AUD/USD traded around 0.7155, close to its highest level in approximately ten weeks despite weaker Australian employment data.
• Australia’s July Consumer Price Index (CPI) will be released on August 26, with expectations of a strong monthly increase but a lower annual inflation rate.
• A hotter underlying inflation reading could revive expectations of another Reserve Bank of Australia (RBA) rate hike, while softer data may push AUD/USD back toward 0.7100.

Current Market Situation

The AUD/USD currency pair is trading at approximately 0.7155 during the Asian session, buoyed by a weaker US dollar and Australia's relatively high interest rates. Despite signs of a cooling domestic labor market, the Australian dollar has remained resilient, indicating that global currency trends are currently more influential than local economic data.

Upcoming CPI Report

The Australian Bureau of Statistics is set to release the July CPI report on August 26 at 11:30 a.m. AEST. The previous report indicated a slowdown in headline inflation to 3.8% in June from 4% in May, with a monthly price decline of 0.1%. Economists anticipate a complex outcome for July, with expectations of a monthly increase in prices but a decrease in the annual rate due to base effects.

Westpac forecasts a monthly CPI rise of 0.84%, with the annual rate expected to decline to 3.3%. The bank also projects a trimmed mean inflation of 0.38% for the month and 3.5% year-over-year, with holiday travel and fuel prices expected to contribute positively.

Importance of the CPI Report for the RBA

The RBA maintained its cash rate at 4.35% during its August meeting, following three rate hikes earlier in the year. The central bank has expressed concerns over persistent inflation and the potential for further rate increases if inflation remains high. A trimmed mean reading above expectations could lead to increased bets on another rate hike, while a softer result may suggest that the current cash rate has peaked.

Impact of Employment Data

Recent employment data showed a decrease of 15,800 jobs in July, with a slight increase in the unemployment rate to 4.5%. Despite this, the Australian dollar has remained strong, largely due to the weakness of the US dollar. The upcoming inflation report is crucial, as a positive surprise could bolster the AUD/USD, while a negative outcome may lead to a correction.

US Dollar Weakness

The Australian dollar's strength is partly attributed to the weakness of the US dollar, driven by concerns over US fiscal sustainability and the Federal Reserve's policy direction. The market is also anticipating Federal Reserve Chair Kevin Warsh's speech at Jackson Hole, which could influence the dollar's trajectory.

Technical Levels to Watch

AUD/USD faces immediate resistance at 0.7200, with a sustained break above this level potentially exposing 0.7250. On the downside, 0.7100 is a key support level, with further declines possibly leading to the 0.7030 to 0.7050 region and the significant 0.7000 threshold.

Possible inflation scenarios include:

• Hotter CPI: Higher inflation could push AUD/USD toward 0.7200 or 0.7250.
• CPI in line: AUD/USD may consolidate between 0.7100 and 0.7200.
• Softer CPI: A disappointing inflation report could weaken the Australian dollar and refocus attention on 0.7100.