Following softer-than-expected U.S. inflation data this week, the market now prices in just a 10% chance of the Federal Reserve hiking rates this month.
The AUD/USD currency pair consolidated Friday following recent gains this week, boosted by tamer-than-expected U.S. inflation readings that significantly reduced the chances of a July rate hike. Bullish sentiment accelerated midweek after Federal Reserve Chairman Kevin Warsh remained characteristically tight lipped about how the central bank intends to tackle persistently elevated inflation, weighing down the dollar.
How Softer U.S. Inflation Is Reshaping Rate Expectations
The AUD/USD’s movement higher began on Tuesday when data released by the Bureau of Labor Statistics showed the consumer price index (CPI) falling by 0.4% in June, dropping the annual inflation rate to 3.5%. By comparison, market watchers had expected a 0.2% monthly decline and 3.8% annual print. The currency saw further buying interest Wednesday after the U.S. producer price index (PPI) also came in tamer than expected, stoking optimism that inflation is cooling.
The softer than anticipated data has given the Aussie a significant boost as it has slashed the likelihood of a U.S. rate hike this month. As of Friday, the CME FedWatch Tool shows just a 10% chance of a July increase, down sharply from a 46% chance at the start of the week. However, looking further ahead, those who trade the Aussie will likely brace for further volatility, with the market still expecting the Fed to lift rates twice before the end of the year.
What the AUD/USD 1‑Hour Chart Now Shows
After breaking down below an established uptrend line earlier this week, the AUD/USD has staged an impressive turnaround as traders repositioned following the softer than anticipated U.S. inflation readings. Below, we take a closer look at crucial support and resistance levels on the one-hour chart worth watching out for.
AUD/USD H1 Price Chart
The first support level to monitor sits around 0.6970. A retracement to this area would likely attract buying interest near the initial pullback that followed the sharp CPI-driven rally, which also closely aligns with the July peak.
Bulls’ failure to defend this level could see the Aussie drop to 0.6960. This area, which has now flipped from prior resistance to future support, sits near a key horizontal trendline connecting several prominent peaks that have emerged on the chart this month with a brief late June countertrend high.
Key AUD/USD Resistance Levels to Watch
Firstly, it’s worth eyeing the 0.7020 level. The pair ran into selling pressure in this area on Wednesday near a horizontal trend line that stretches back to the low of a retracement on the chart in early June.
A bullish move above this level opens the door to a rally toward 0.7050. This region may provide overhead resistance on the chart near a prominent swing low that formed on June 16. It’s also worth pointing out that this location sits near a measured move target that takes the impulsive move after the CPI print and projects it from the low of the pair’s first pullback following that sharp advance.
Warsh’s Silence Adds Another Layer to the Dollar Story
The AUD/USD’s rally this week received an additional boost from Federal Reserve Chairman Kevin Warsh giving little away on how the central bank intends to fight stubbornly elevated inflation. While other Fed board members have been more on the front foot outlining their views about the economic outlook and interest rates, Warsh, while acknowledging to lawmakers that prices remain too high, provided little detail on what he would need to see to trigger more hawkish policy action.
How This Week’s Moves Change the AUD/USD Balance of Risk
My view on the AUD/USD has pivoted to a more bullish outlook following this week’s softer-than-expected U.S. inflation readings, which has significantly reduced the risk of an interest rate hike later this month. Still, I remain cautious about sudden periods of U.S. dollar strength that could weaken the Aussie, with ongoing high levels of AI spending and the potential for further energy shocks having the potential to reignite pricing pressures.
Sources:
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
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