AUD/USD declines on USD strength, hawkish RBA outlook sustains

• AUD/USD weakens on Thursday as broad US Dollar strength pressures the Aussie.
• Australia’s Trimmed Mean CPI rises to 3.4% YoY, keeping RBA rate expectations elevated.
• Sticky US inflation tempers Fed easing hopes, supporting the Greenback.

AUD/USD trades with a negative bias on Thursday as broad-based US Dollar (USD) strength weighs on the Australian Dollar (AUD). At the time of writing, the pair is trading around 0.7078, down 0.60%.

The pair has now trimmed most of the previous day’s gains, which were driven by stronger-than-expected inflation data that boosted expectations the Reserve Bank of Australia (RBA) could maintain a tighter policy stance for longer.

The Trimmed Mean CPI rose 3.4% YoY in January, up from 3.3% in December. Meanwhile, the headline Consumer Price Index (CPI) held steady at 3.8% YoY, unchanged from the previous month and remaining above the RBA’s 2-3% target range.

RBA Governor Michele Bullock said earlier this week, “We’re in a situation where the labour market, we think, is a little bit tight, and inflation is a bit elevated. I don’t think it’s taking off again, but it’s a little bit elevated.”

She added that the economy is “close to balance — maybe a little bit tight,” noting that “this is where it’s difficult” and that policy judgements are becoming more challenging.

The RBA is widely expected to raise interest rates again, with futures pricing pointing to a potential move in May, while markets largely anticipate the Bank will hold rates steady at its March meeting.

Meanwhile, the US Dollar is drawing support from fading Federal Reserve (Fed) rate-cut expectations as disinflation progress shows signs of stalling and inflation remains above the Fed’s 2% target.

Data released last week showed the Core Personal Consumption Expenditures (PCE) Price Index — the Fed’s preferred inflation gauge — rose 0.4% MoM in December, accelerating from 0.2% in November. On an annual basis, Core PCE climbed to 3.0% YoY, up from 2.8% previously.

Markets now widely expect the Fed to keep interest rates unchanged at its March and April meetings, while scaling back expectations for a June rate cut, according to the CME FedWatch Tool.

Looking ahead, attention now turns to Friday’s US Producer Price Index (PPI) data for January. Analysts expect headline PPI to rise 0.3% MoM, easing from the previous 0.5% increase. On an annual basis, PPI is forecast to moderate to 2.6% from 3.0%.