Australian Dollar strengthens further following US PCE figures

• AUD rose against USD due to US inflation reduction and a potential dovish stance from the Fed.
• Soft PCE data from the US may benefit the Aussie policy divergence between the RBA and Fed.
• RBA's delayed rate cuts could bolster the Aussie, contrasting with other G10 central banks' reduction strategies.

Friday's session recorded a significant uplift in the Australian Dollar (AUD) against the US Dollar following an unexpected inflation reduction in the US in May. As a result, expectations of a possibly dovish stance from the Federal Reserve (Fed) grew, leading to a likely divergence in policy with the Reserve Bank of Australia (RBA).

The Australian economy demonstrates minor signs of weakness. However, the heightened inflation rates maintain a stubborn resilience, preventing the RBA from implementing potential rate cuts. The RBA is foreseen delaying rate cuts, making it one of the last G10 country central banks to adopt a reduction policy. These delayed cuts might enhance the further strengthening of the Aussie.

Daily digest market movers: Aussie continues to strengthen amid robust CPI figures

• In terms of the data at hand, the Australian Dollar's strength was bolstered by increased expectations of the RBA further hiking rates after hot Consumer Price Index (CPI) data reported earlier in the week.
• Market indications are now pricing in approximately 40% odds of a 25-basis-point rate hike from RBA on September 24, extending to 50% leading up to November 5.
• US inflation fell to 2.6% YoY in May from 2.7% in April, according to the US Bureau of Economic Analysis. This decrease matched market expectations.
• On a monthly basis, the Personal Consumption Expenditures (PCE) Price Index remained static. The core PCE Price Index rose by 2.6%, a decrease from the 2.8% escalation that was recorded in April.
• As a result, this downtrend toward the Fed’s 2.0% target bumped the probability of a Fed interest rate cut in September to 66%, up from 64% prior to the PCE release, as per the CME FedWatch Tool.

Technical analysis: AUD/USD maintains buyer interest above 20-day SMA

From a technical outlook, the indicators displayed signs of recovery with the Relative Strength Index (RSI) staying above 50, and the Moving Average Convergence Divergence (MACD) printing a fresh green bar. Critical to the future momentum of the pair will be the defense of the 20-day Simple Moving Average (SMA) at 0.6640. As long as buyers manage to sustain above this key level, the future outlook appears promising.

Notably, on Friday, the pair managed to lift back above the 20-day SMA, after dipping to a low of 0.6620, a key indication that buyer defenses remain robust.