Australian Dollar dips after lower-than-expected inflation data

• Australian Dollar weakens after inflation data comes out below expectations, suggesting the RBA may take a less hawkish stance going forward. 
• A fall in the price of WTI Crude Oil, a major export for Australia, after API data shows a rise in inventories further weighs on the pair.
• The FOMC meeting later on Wednesday could impact the US Dollar and cause volatility for AUD/USD.  

The Australian Dollar (AUD) weakens against the US Dollar (USD) on Wednesday, after Aussie inflation data surprises to the downside, suggesting a less hawkish stance from the Reserve Bank of Australia (RBA) going forward. Traders now await the Federal Reserve’s (Fed) July meeting to conclude later on Wednesday and the publication of their statement of monetary policy for further directional cues. 

The AUD/USD pair trades in the 0.67s as the US session gets underway.  

Australian Dollar news and market movers 

• The Australian Dollar reverses lower against the US Dollar after the release of Australian Consumer Price Index (CPI) data for Q2 shows a steeper-than-expected slowdown in inflation. This suggests the RBA will take a less hawkish stance going forward, with interest rates perhaps coming down sooner than expected. Lower interest rates are negative for currencies as they are not as attractive to foreign investors looking for a place to park their capital. 
• Australian CPI inflation came out at 6.0% in Q2 YoY when 6.2% had been forecast versus the 7.0% in Q1. 
• On a QoQ basis, CPI registered a 0.8% rise versus the 1.0% forecast by economists and 1.4% previous. 
• The Reserve Bank of Australia’s (RBA) preferred gauge, RBA Trimmed Mean CPI, measured quarterly, increased by 5.8% YoY in Q2 versus the 6.0% rise estimated and the 6.6% of Q1.
• QoQ RBA Trimmed Mean CPI rose 1.0% versus the estimated 1.1% rise, but below the 1.3% rise in Q1. 
• Inventory data from the American Petroleum Institute (API) showed a rise in stockpiles suggesting lower demand and weighing on Oil, one of Australia’s key exports. This acts as a headwind for the Aussie. 
• The Federal Reserve’s (Fed) interest rate decision at 18:00 GMT on Wednesday could impact the AUD/USD pair by way of influencing the US Dollar. 
• The Fed is already expected to raise interest rates by 0.25%, however, the wording of its accompanying statement may impact the US Dollar. 
• A more hawkish commentary will come as a surprise as the market is not pricing in further rate hikes from the Fed. As such, it would strengthen the US Dollar and weigh on the AUD/USD pair. 
• The opposite is true if the Fed indicates it may have reached peak rate or even talks about possibly bringing rates down in 2024. 
• There exists a high risk that the RBA will have to cut rates from their current 4.1% level in 2024 because the Australian house market is dominated by variable-rate mortgages so it is more sensitive to changes in interest rates, and homeowners have recently been adversely affected by higher mortgage interest repayments, according to Bloomberg Intelligence, as quoted by Financial Review. 
• The RBA’s Cash Rate is 4.1%, which is below the Fed’s 5.25% (likely to be 5.50% after Wednesday) – overall favoring capital flows to the Greenback versus the Aussie. 
• China’s pledge to increase support for the economy has helped the Australian Dollar since it is Australia’s largest trading neighbor. 

Australian Dollar technical analysis 

AUD/USD is in a sideways trend on both the long and medium-term charts. The February 2023 high at 0.7158 is a key hurdle on the weekly chart, which if vaulted, will alter the outlook to one that is more bullish longer term. 

Likewise, the 0.6458 low established in June is a key level for bears, which if breached decisively, would give the chart a more bearish overtone from a longer-term perspective. 

Australian Dollar vs US Dollar: Weekly Chart

A confluence of support made up of all the major daily simple moving averages (50, 100 and 200) exists in the upper 0.66s and early 0.67s. This is expected to provide a rigid cordon of support, acting as a barrier to further losses.

The exchange rate has already bounced off the 200-day Simple Moving Average (SMA) at 0.6725 and completed a pivot higher. If Wednesday continues the bullish price action, that will add confirmation of a reversal of the downmove.  

Australian Dollar vs US Dollar: Daily Chart

Despite the decline witnessed so far on Wednesday, there is potential for a recovery, given the underpinning support from the major MAs. 

A decisive break above the June 16 high at 0.6900 would provide stronger confirmation of a more bullish outlook. 

Likewise, a decisive break below the 50 and 100-day Simple Moving Averages (SMA) would confirm a continuation of the recent bear move lower to a speculative target at the June and July lows in the mid-0.64s. 

A decisive break consists of a long daily candlestick, which pierces cleanly above or below the critical level in question and then closes near to the high or low of the day. It can also mean three up or down days in a row that break cleanly above or below the level, with the final day closing near its high or low and a decent distance away from the level.