Australian Dollar Outlook: Fed and CPI to Test AUD/USD Recovery

AUD/USD enters a pivotal week with the Federal Reserve meeting and Australia's quarterly CPI set to drive the next major move. While the Australian dollar has recovered over the past three weeks, expectations for another RBA rate hike, renewed Middle East tensions and the outlook for the US dollar could determine whether the rally extends or begins to fade.

 

View related analysis:

• US Dollar Rally Builds Momentum, Crude Oil Holds the Key
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• Australian Dollar Jumps as Employment Data Backs RBA Hawkish Bias
• Japanese Yen Outlook: USD/JPY Breaks Out in Style, GBP/JPY and CAD/JPY in Focus

 

 

Australia This Week: Economic Data and Events for AUD/USD Traders

The Federal Reserve meeting is likely to be the primary driver for AUD/USD this week, with any shift in the Fed's guidance set to influence the US dollar. Australia's quarterly CPI report is the key domestic event, carrying the potential to reshape expectations for the RBA if inflation surprises materially to the upside. Meanwhile, developments in the Middle East remain an important wildcard for broader market sentiment and risk appetite.

 

 

Australian Labour Market Firm, but Inflation Matters More

Last week's Australian employment report appeared strong on the surface, helping justify the RBA's existing tightening bias. However, much of the employment gain reflected a higher participation rate rather than a sharp acceleration in hiring, while elevated underemployment takes some of the shine off the headline figures. Unless quarterly CPI delivers a meaningful upside surprise, the labour market data alone is unlikely to convince the RBA that another rate hike is imminent. Market pricing for an August RBA rate hike had risen to 43% by Friday's close following the employment report and renewed tensions in the Middle East.

The RBA has previously warned that higher crude oil prices could warrant tighter policy if they lift inflation expectations, even at the expense of weaker employment. And that makes the Middle East conflict a greater threat to RBA policy than employment data. Though a hot inflation print this week could tip RBA hike odds above 50%.  

RBA Govenor Michelle Bullockl speaks on Tuesday. But given the proximity to the CPI release, there's a reasonable chance she'll avoid giving away much about the policy outlook. If so, the market reaction should be limited.

Source: ABS, RBA, LSEG

 

 

 

Fed to Hold, but Will Warsh Signal More Hikes?

The Federal Reserve is widely expected to leave interest rates unchanged, leaving investors focused on Chair Kevin Warsh’s guidance and any changes to the policy statement. Markets continue to anticipate rate hikes later this year, so any pushback against those expectations could provide fresh support for the US dollar. Conversely, a more dovish tone would likely weigh on the greenback and offer support to AUD/USD.

While the latest flare-up in the Middle East has raised inflation concerns, the recent soft US inflation report may give the Federal Reserve scope to look through any energy-driven price shock. Although Fed funds futures imply a 55% chance of a September hike and a 39% chance of another in December, I doubt policymakers will provide a strong signal in either direction at this week's meeting.

While Core PCE will be watched to see whether it reinforces the softer CPI report, traders are likely to place greater weight on crude oil prices and the outcome of this week's Fed meeting when assessing the inflation outlook.

 

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AUD/USD Technical Analysis: Australian Dollar vs US Dollar

AUD/USD trades near 0.7000 while the Australian dollar outperforms most major currencies ahead of Fed and Australian CPI events.

 

What Is Driving AUD/USD This Week?

• US dollar remains the dominant driver, with AUD/USD maintaining a strong -0.90 60-day correlation to the DXY.
• China still matters, with the yuan (CNH) retaining a strong positive correlation over the 20- and 60-day periods.
• Commodity links remain firm, particularly with gold, copper and WTI crude, reinforcing AUD's sensitivity to the global growth and inflation outlook.
• Equity correlations are mixed, with the 10-day relationship to the S&P 500 strengthening while the longer-term link remains weak.
• Watch the DXY first—a sustained US dollar move is still the most likely catalyst for the next major move in AUD/USD.

 

Source: LSEG

 

 

AUD/USD Futures Positioning | COT Report

Large speculators increased their net-short exposure for a sixth consecutive week to 37.7k contracts, the largest net-short position in 32 weeks. Asset managers reduced their net-long exposure by 5.4k contracts to 35.1k. While neither group is signalling an extreme in positioning, AUD/USD has risen for three consecutive weeks despite increasingly bearish speculative positioning. If this week's CPI report fails to strengthen expectations for an RBA rate hike, AUD/USD's recent rally could struggle to extend.

Source: CFTC (COT) CME, LSEG

 

 

For traders wanting a deeper understanding of futures positioning, I’ve also published a guide on how to read and interpret weekly COT data in forex markets.  

 

 

 

AUD/USD Options and Volatility Analysis (Risk Reversals, HVN Levels)

It remains a mixed picture for AUD/USD, although implied volatility is edging higher ahead of Australia's quarterly CPI report and the Fed meeting. The one-week implied volatility range sits between 0.6824 and 0.7057, while spot prices continue to tussle with the 0.7000 level.

A doji formed last week and closed below 0.7000, warning that the recent rebound may be losing momentum. The daily 50-day moving average is also acting as resistance, while risk reversals suggest growing demand for downside protection. If Australia's inflation report fails to surprise materially to the upside and the Fed refrains from signalling a more hawkish policy outlook, traders may look to fade minor rallies on expectations that AUD/USD will surrender some of the gains made over the past three weeks.

Source: ICE, TradingView

 

 

View the full economic calendar

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge