Forex Market: AUD/USD holds gains as upcoming inflation figures will be the next test for interest rate outlook

AUD/USD held gains registered in the prior trading day on Tuesday as market players awaited inflation figures in the world’s two largest economies for more clues on central bank interest rates.

AUD/USD has remained within the 0.7360-0.7470 range since November 4th, but according to Commonwealth Bank strategists, risks for the Aussie are “skewed down because RBA rate hike expectations can adjust lower.”

Currently, markets are pricing a series of rate hikes from the Reserve Bank of Australia (RBA), starting in 2022, no matter that the central bank has said it does not expect inflation rate and wage growth to be sufficiently high until at least late 2023.

A drop in thermal coal prices on Tuesday as well as lower iron ore prices in recent days because of weak Chinese demand and increasing portside inventory also mounted certain pressure on the commodity currency, while limiting upside.

Meanwhile, inflation data from the United States and China, scheduled to be released tomorrow, presents the next test of markets’ assessment on the outlook for interest rates.

Standard Chartered analysts said they expected the Federal Reserve to lift interest rates slowly, with the first hike probably made in Q3 2022.

“We expect the Fed to emphasise the fact that the U.S. economy is approaching inflation and maximum employment targets, rather than expressing concern about elevated inflation,” strategists Steve Englander and John Davies wrote in an investor note.

“The message likely will be a gradual pace of further rates hikes rather than an abrupt move.”

As of 9:55 GMT on Tuesday AUD/USD was inching up 0.08% to trade at 0.7427, while moving within a daily range of 0.7390-0.7432. The major currency pair has retreated 1.20% so far in November, following a 4.03% gain in October.

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled -1.28 basis points (-0.0128%) as of 9:15 GMT on Tuesday, up from -2.0 basis points on November 8th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7412
R1 – 0.7440
R2 – 0.7459
R3 – 0.7487
R4 – 0.7515

S1 – 0.7393
S2 – 0.7365
S3 – 0.7346
S4 – 0.7327