Australian Dollar languishes around 0.6900 with US inflation data in the spotlight

• AUD/USD is struggling to take off from seven-month lows at 0.6885, following a 2.5% drop in the last eight days.
• The US Dollar consolidates near mid-term highs on Thursday as investors await US PCE inflation data.
• Australian Unemployment rate declined in May amid higher-than-expected employment creation.

The Australian Dollar (AUD) remains stuck near two-month lows against the US Dollar (USD) on Thursday, consolidating losses after plummeting about 2.5% in an eight-day losing streak. The positive Australian employment figures have failed to support the pair, with investors wary of selling the USD ahead of the US Personal Consumption Expenditures (PCE) Price Index figures, due later on the day.

The US Federal Reserve's (Fed) inflation gauge of choice is expected to show that price pressures accelerated further in May, adding to the case of an interest rate hike later this year. Headline PCE inflation is seen accelerating to a three-year high of 4.1%, from 3.8% un April, with the core reading ticking up tp 3.4% in the 12 months to May, from 3.3% in the previous month. 

Markets are pricing a Fed rate hike in October

Data from the CME Fed Watch Tool shows that futures markets are pricing above 30% chances of a quarter-point rate hike next month, up from 17% one month ago, while the odds for a hike in September have risen to 65% from 40% last month. This is underpinning support for the US Dollar.

In the Geopolitical front, comments from US officials show optimism about a swift end to the conflict, although the uncertainty about the status of the Strait of Hormuz and Iran’s nuclear program remains high, keeping investors cautious and risk-sensitive assets, like the AUD, subdued so far.

Against this background, the positive Australian employment data released earlier on the day has passed practically unnoticed. The Unemployment Rate declined to 4.4% in May from 4.5% in April, amid a 40.3K increase in net employment, beating market expectations of a 25K rise and reversing the 40.7K April drop. 

These figures back the Reserve Bank of Australia’s forecasts, hinting at a tighter labour market in the coming months and leaving the door open to further interest rates if inflationary pressures remain above target.