Australian Dollar rallies despite softer CPI as US Dollar tumbles after Fed, weaker data

• AUD/USD gains more than 0.8% as the Fed meeting and disappointing US growth data weigh on the US Dollar.
• Softer Australian inflation reduces expectations of a near-term Reserve Bank of Australia rate hike.
• Cooling US inflation reinforces the view that the Federal Reserve could have less room to tighten policy.

AUD/USD trades around 0.7010 on Thursday at the time of writing, up 0.82% on the day as broad-based US Dollar (USD) weakness outweighs the negative impact of softer Australian inflation.

The Australian Dollar (AUD) initially came under pressure after data showed Australia's Consumer Price Index (CPI) slowed to 3.8% YoY in June from 4% previously, below the 4% market consensus. The softer inflation reading prompted investors to sharply scale back expectations of an imminent Reserve Bank of Australia (RBA) interest rate hike, with Reuters reporting that market pricing for an August increase dropped from nearly 21% to around 3%-4%.

However, the Aussie later reversed higher as the US Dollar weakened sharply following the Federal Reserve (Fed) meeting and a series of softer-than-expected macroeconomic releases in the United States (US).

The US economy expanded at an annualized rate of 1.5% in the second quarter, missing market expectations of 2.1% and slowing from 2.1% growth in the first quarter. According to the Bureau of Economic Analysis, the slowdown mainly reflected weaker government spending, investment and exports, although stronger consumer spending partly offset these headwinds.

Inflation data also supported expectations that the disinflation process continues in the United States. The Personal Consumption Expenditures (PCE) Price Index fell 0.1% MoM in June, while the annual rate eased to 3.7% from 4.1%. Meanwhile, the Core PCE Price Index, the Federal Reserve's (Fed) preferred inflation gauge, slowed to 3.3% YoY from 3.4%.

These figures follow Wednesday's Fed decision to leave interest rates unchanged at 3.5%-3.75% while maintaining a relatively hawkish tone. Nevertheless, the US Dollar headed lower as markets questioned the need for additional monetary tightening despite persistent inflation concerns.