Australian Dollar reverses post-PCE rebound as US Dollar recovers

• AUD/USD falls 0.41% on Wednesday after fully erasing its initial rebound following the US inflation release.
• Softer-than-expected PCE inflation initially weighed on the US Dollar, but stronger employment and growth data help limit the decline.
• Markets reduce expectations for an October rate hike while shifting bets toward December.

AUD/USD declines 0.41% on Wednesday and trades around 0.6960 at the time of writing, having fully erased its initial rebound following the release of softer-than-expected United States (US) inflation data. The pair comes under renewed selling pressure as the US Dollar (USD) rebounds from its post-data lows.

The US Personal Consumption Expenditures (PCE) Price Index showed that annual headline inflation remained unchanged at 3.4% in August, below the 3.7% expected by markets. July's reading was also revised lower to 3.4% from the previously reported 3.7%.

The core PCE Price Index, which excludes volatile food and energy components and is closely watched by the Federal Reserve (Fed) as a measure of underlying inflation, remained steady at 3% YoY, below the 3.3% market forecast. July's reading was also revised down to 3% from 3.3%. On a monthly basis, headline PCE rose 0.3%, while core PCE increased 0.2%.

The softer inflation figures initially triggered selling pressure on the US Dollar, allowing AUD/USD to rebound immediately after the release. However, the move quickly faded as investors also digested stronger US employment and economic growth figures.

Automatic Data Processing (ADP) reported that private-sector employment increased by 90K jobs in September, exceeding expectations for a 70K rise and accelerating sharply from the revised 36K increase recorded in August.

US economic growth also delivered an upside surprise. Annualized Gross Domestic Product (GDP) growth for the second quarter was revised higher to 2.2%, from the previous estimate of 1.5% and above the 1.5% expected by markets. The revision indicates that economic growth accelerated from the 2.1% pace recorded in the first quarter.

The combination of softer inflation and resilient economic activity is leading markets to reconsider the timing, rather than the prospect, of further monetary tightening. According to the CME FedWatch tool, investors now assign around a 35% chance to a rate increase in October, down from nearly 51% a day earlier and 71% a week ago.

Meanwhile, expectations for a later move remain firm, with the chance of a rate hike in December rising to nearly 60%, from 49.4% a day earlier. The shift in expectations toward December helps the US Dollar recover from its immediate post-PCE decline.

The recovery in the US Dollar puts renewed pressure on AUD/USD, which similarly reverses its initial reaction to the inflation figures and returns to negative territory. Persistent expectations of another Fed rate increase later this year could continue to provide support to the Greenback despite the softer PCE readings.

RBA seen on hold as softer inflation and housing strain curb Aussie tailwinds

Analysts at Commerzbank argue that the latest data reinforce the case for policy patience from the RBA. “One day after the Reserve Bank of Australia’s monetary policy meeting, the CPI figures released today also show why 1.5 additional rate hikes by the RBA - as the market was still expecting yesterday - are likely to be too much.” They acknowledge that “there’s no question that inflation is still too high, and it will take a while before it returns to the middle of the target range,” but stress that “interest rate hikes always take effect with a certain time lag.”

In their view, the lagged impact is particularly evident in the real estate sector, “where building permits fell again in August by 6.1% compared to the previous month and prices in the largest cities continue to decline,” suggesting the central bank “would likely be well advised to wait and see how things develop in the coming months.” Against this backdrop of softer CPI and mounting housing weakness, Commerzbank concludes that “as a result, the AUD is unlikely to receive any further tailwind.”

AUD/USD technical analysis

In the one-hour chart, AUD/USD trades at 0.6956, extending its slide below the 100-period simple moving average (SMA) at 0.7005 and the 200-period SMA at 0.7051, which keeps the near-term bias bearish. The Relative Strength Index (14) around 35 suggests lingering downside pressure, though not yet in outright oversold territory, as the pair consolidates just above the 0.6950 structural floor.

On the topside, initial resistance emerges at 0.6980, followed by the 0.7005 horizontal barrier coinciding with the 100-period SMA, while higher caps are seen at 0.7045, 0.7075, 0.7105 and 0.7140. On the downside, the only nearby support is the horizontal level at 0.6950, and a clear break beneath this floor would open the door to an extension of the hourly downtrend.

(The technical analysis of this story was written with the help of an AI tool. Know more.)