Australian Dollar gains ground due to risk-on mood, US CPI awaited

• The Australian Dollar appreciates due to the improved risk sentiment on Wednesday.
• The Australian government is targeting headline inflation and seeking to ease cost-of-living pressures by earmarking billions.
• The US Dollar lost ground as investors digested higher-than-expected US PPI data.

The Australian Dollar (AUD) remains steady with a positive sentiment despite the lower-than-expected Wage Price Index (Q1) released on Wednesday by the Australian Bureau of Statistics. This index serves as an indicator of labor cost inflation. The appreciation of the Aussie Dollar could be attributed to the improved risk appetite.

The Australian Budget for 2024-25 has returned to a deficit after recording a surplus of $9.3 billion in 2023-24. The Australian government aims to tackle headline inflation and alleviate the cost of living pressures by allocating billions to reduce energy bills and rent, alongside initiatives to lower income taxes.

The US Dollar Index (DXY), which gauges the performance of the US Dollar (USD) against six major currencies, is experiencing continued losses for the second session. Investors have digested higher-than-expected US Producer Price Index data for April while awaiting the Consumer Price Index report scheduled for Wednesday.

Federal Reserve Chair Jerome Powell has anticipated a continued decline in inflation. Powell expressed less confidence in the disinflation outlook compared to previous assessments. He also highlighted that Gross Domestic Product (GDP) growth is expected to reach 2% or higher, attributing this positive forecast to the strength of the labor market.

Daily Digest Market Movers: Australian Dollar appreciates due to improved risk appetite

• Australia’s Wage Price Index (QoQ) showed a 0.8% increase in the first quarter, falling slightly below the anticipated rise of 0.9%. On a year-over-year basis, it saw a 4.1% increase, also slightly lower than the expected 4.2% rise.
• The US Bureau of Labor Statistics (BLS) reported that the Producer Price Index (PPI) increased by 0.5% month-over-month in April, surpassing the forecast of 0.3% and rebounding from March's contraction of -0.1%. Additionally, the Core PPI, which excludes volatile food and energy prices, also surged by 0.5% MoM, exceeding projections of 0.2%.
• A Reuters report cited Treasurer of Australia Jim Chalmers, expressing his expectation that the current headline inflation rate of 3.6% will return to the Reserve Bank of Australia’s target range of 2-3% by the end of the year. In the event that this scenario unfolds, it is likely that the central bank will consider cutting interest rates earlier than markets had anticipated.
• Australia's Treasury announced on Sunday that they forecasted that inflation could re-enter the Reserve Bank of Australia's (RBA) target range by the end of 2024. In their December outlook, officials predicted that CPI inflation would decrease to 3.75% by mid-2024 and 2.75% by mid-2025, aligning it with the RBA's target range.
• Federal Reserve Bank of New York conducted a consumer sentiment survey, indicating that US consumers anticipate a broad acceleration in inflation over the next year, with expectations reaching 3.3%. This marks an increase from the 3.0% figure reported in March for consumer one-year inflation expectations.
• According to Reuters, Fed Vice Chair Philip Jefferson advocated for the retention of current interest rates until signs of inflation easing become more apparent.

Technical Analysis: Australian Dollar maintains its position above 0.6600

The Australian Dollar trades around 0.6630 on Wednesday. The AUD/USD pair is consolidating within a symmetrical triangle pattern. Moreover, the 14-day Relative Strength Index (RSI) indicates a bullish bias, remaining above the 50 level.

The AUD/USD pair may challenge the upper boundary near the swing area at 0.6650. A breakthrough above this level could lead the pair to revisit March's high at 0.6667, with further upward momentum possibly targeting the psychological level of 0.6700.

On the downside, the psychological level of 0.6600 appears as the immediate support, followed by the 14-day Exponential Moving Average (EMA) at 0.6585. If the pair breaks below this EMA, it might face additional selling pressure, potentially moving toward the region around the lower boundary of the symmetrical triangle around the support level of 0.6465.

AUD/USD: Daily Chart