AUD/USD trades near fresh 1-month high on Fed rate peak bets

Key points

The Australian Dollar was holding gains against its US counterpart on Friday and looked set to register its best week since early November 2022, as market players bet the Federal Reserve was nearing the end of its rate-hiking cycle amid subsiding inflation.

Producer price inflation in the US rose at the smallest annual rate in three years in June, data showed on Thursday.

One day earlier it became clear that annual headline CPI inflation in the US had slowed to 3% in June, while annual core CPI inflation – to 4.8%.

“Markets are generally pretty pleasant with the lower inflation data, because lower inflation together with the still resilient labour market supports the narrative of a soft landing in the U.S. economy,” Carol Kong, currency strategist at Commonwealth Bank Of Australia, was quoted as saying by Reuters.

“But we still maintain our view that the U.S. will enter a recession later this year because of the impact of past and potentially future interest rate hikes.”

Markets are pricing in an over 90% chance of a 25 basis point interest rate increase at the Fed’s meeting later in July, but no further hikes for the remainder of 2023.

Federal Reserve Governor Christopher Waller said on Thursday that he supported two more quarter percentage point hikes this year.

“I see no reason why the first of those two hikes should not occur at our meeting later this month,” Waller said in a speech prior to a meeting hosted by The Money Marketeers of New York University.

“If inflation does not continue to show progress and there are no suggestions of a significant slowdown in economic activity, then a second 25-basis-point hike should come sooner rather than later, but that decision is for the future,” he said.

Meanwhile, the Aussie showed a muted reaction to media reports that Michele Bullock had been appointed as the next Reserve Bank of Australia Governor, replacing Philip Lowe, to become the first woman heading the monetary authority. Bullock is considered by analysts as a safe pair of hands.

As of 7:31 GMT on Friday AUD/USD was edging down 0.32% to trade at 0.6867. During the early phase of the Asian session the major Forex pair went up as high as 0.6895. The latter has been the pair’s strongest level since June 16th (0.6899).

AUD/USD was set for a 2.62% weekly advance.