Forex Market: AUD/USD off one-week highs ahead of US CPI inflation data, Australian consumer sentiment weakens further

After a 1% surge during the previous trading day, AUD/USD was a notch weaker on Tuesday, as investors were expecting the latest CPI inflation report from the US, wary of a surprising figure that could reinforce the case of more interest rate hikes.

Yet, since prior CPI reports led to mixed moves within the Forex market, it is not certain if another red-hot inflation reading would bolster rate expectations along with the US Dollar, or trigger movement in opposite directions by further increasing concerns over stagflation.

“The market understandably is waiting for the numbers to then reprice, rather than moving in anticipation of them,” Ray Attrill, head of foreign exchange strategy at National Australia Bank, was quoted as saying by Reuters.

“We’ve had six CPI numbers this year, four of those six have been upside surprises…but the impact on the dollar is a little bit ambiguous.”

Analysts on average are expecting a slowdown in annual inflation to 8.7% in July from 9.1% in June.

Meanwhile, a measure of consumer sentiment in Australia dropped for a ninth consecutive month in August to lows unseen since the beginning of the pandemic, with another interest rate increase by the Reserve Bank of Australia coupled with rising cost of living may dampen the mood further.

The Westpac-Melbourne Institute index of consumer sentiment was reported at 81.2 in August, down 3% compared to July and 22% compared to August 2021.

The Reserve Bank of Australia raised its cash rate by 50 basis points to 1.85% at its policy meeting earlier this month, while delivering 175 basis points of rate hikes in the past four months – the most considerable string of moves since early 1990s. The central bank has warned that further tightening is required to curb surging inflation.

Confidence among mortgage holders dropped 8.9%, while that among renters edged up 0.2%, the data showed.

As of 8:03 GMT on Tuesday AUD/USD was inching down 0.06% to trade at 0.6977. Yesterday the major Forex pair went up as high as 0.7009, which has been its strongest level since August 2nd (0.7032).

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 -34.5 basis points (-0.345%) as of 8:15 GMT on Tuesday, up from -37.3 basis points on August 8th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.6963
R1 – 0.7028
R2 – 0.7074
R3 – 0.7139
R4 – 0.7204

S1 – 0.6916
S2 – 0.6851
S3 – 0.6805
S4 – 0.6758