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FX.co ★ AUD/USD. US dollar moves on the inertia of the inflation release

AUD/USD. US dollar moves on the inertia of the inflation release

Yesterday, the AUSD/USD pair declined by more than 150 points, after sharply rising to the borders of the 0.79 level. There is no doubt that this fall was primarily due to the strengthening of the US dollar, which reacted to the unprecedented surge in America's inflation. As a result, the traders of the AUD/USD pair was not able to stay within the range of 0.7820-0.7990 and so, it returned to the previous range of 0.7680-0.7790.

AUD/USD. US dollar moves on the inertia of the inflation release

The US dollar, which dominated the entire market yesterday, was the main driving force behind the AUD/USD decline. This currency could not ignore the strong macroeconomic report this time. The abrupt inflation growth has returned the issue of early curtailment of QE and an increase in the interest rate. Yesterday, hawkish sentiment prevailed among traders, which allowed the dollar to strengthen its position against the basket of major currencies. Such a release was really surprising. The general consumer price index came out at 4.2% against the forecasted growth of 3.6% (from 2.6% in March), significantly exceeding the Fed's target level. The indicator also entered the green zone in monthly terms, reaching 0.8%, when experts expected it to slow down to 0.2%. In fact, the indicator has been consistently rising for four consecutive months, reaching its highest level since spring 2016. The core inflation was also encouraging. The base CPI (excluding food and energy) surged to 3% in annual terms, against the expected growth of 2.3%.

Such optimistic figures reminded traders once again that the Fed may have to curb inflationary growth by tightening monetary policy parameters. After yesterday's release, the market raised the probability of an interest rate hike between March and June 2023 to 100%, while the probability of a rate hike at next year's December meeting rose to 80%.

But despite the increased volatility of dollar pairs, the reaction of the US currency was still restrained. On the one hand, the US dollar index left the multi-week lows, but on the other hand, it remained in the area of the 90th figure. Such dynamics is weakly correlated with the breakthrough growth of the main inflation indicators.

All this suggests that traders still doubt that the Fed will reconsider its "dovish" position. In my opinion, these doubts are well-founded. It can be recalled that the members of the US regulator foresaw the implementation of such a scenario, but at the same time, they assured traders in advance of their commitment to the accommodative policy. The essence of the Fed's "dovish position" comes down to several rhetoric. First, the Federal Reserve said that the growth of inflation will be temporary, and will be over in the second half of the year. Second, the Central Bank representatives stated that the inflation growth is due to the effect of the low base of last year, when the coronavirus crisis fully manifested itself. Lastly, the members of the regulator do not get tired of repeating that the Fed needs a steady increase in inflation, and not a one-time inflationary surge. "One-time success is not a trend". This statement will be heard from the Fed representatives more than once.

It is worth noting that the above-mentioned rhetoric were already said by the Fed's Vice President, Richard Clarida, when commenting on the data released. Most likely, it can be assumed that the rest of his colleagues, including Jerome Powell, will take a similar position.

In addition, do not forget about the failed Nonfarm data. The April data on the labor market did not met the forecasted values, reflecting the "unhealthy trends" in this area. According to a number of Fed representatives, inflationary growth should coincide with strong employment.

AUD/USD. US dollar moves on the inertia of the inflation release

In other words, yesterday's inflation release brought back the issue of early QE curtailment to the agenda, thereby strengthening the US dollar's position. But given the previous rhetoric of the Fed representatives, it can be assumed that the national currency will not be able to organize a long-term rally It is very possible that the Fed members will refute the "hawkish" intentions, leveling the corresponding expectations of dollar bulls. This fact will put significant pressure on the dollar.

However, the US dollar currently continues to move by the inertia of yesterday's impulse – including in pair with the Australian currency. Most likely, the AUD/USD bears will manage to decline to the lower border of the range of 0.7680-0.7790, namely to the lower line of the Bollinger Bands indicator on the daily chart. Long positions can be considered from the level of 0.7680 to the level of 0.7740. It is the nearest resistance level, which corresponds to the Kijun-sen line on the same time frame.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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