AUD/USD retreats as US Dollar strengthens on inflation fears, ignoring mixed data

• AUD/USD trims part of its weekly gains and retreats below 0.7050.
• Investors assess a series of mixed US economic releases, including PCE inflation and the GDP revision.
• Rising Oil prices and geopolitical tensions support the US Dollar and weigh on risk-sensitive currencies.

AUD/USD trades lower on Friday at around 0.7040 at the time of writing, down 0.46% on the day, after hitting a multi-year high at 0.7187 earlier in the week. The pullback comes as the US Dollar (USD) strengthens and risk sentiment deteriorates across financial markets.

The US Dollar finds support as investors digest a batch of economic data from the United States (US). Inflation, measured by the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred gauge, eased slightly to 2.8% YoY in January from 2.9% in December, below market expectations. On a monthly basis, the index rose 0.3%, in line with forecasts. Meanwhile, the core PCE Price Index, which excludes volatile food and energy prices, increased 3.1%YoY, matching analysts’ estimates.

Other data pointed to a softer economic backdrop. The US Gross Domestic Product (GDP) growth for the fourth quarter was revised sharply lower to 0.7% YoY from the initial estimate and market expectation of 1.4%.

Despite these mixed indicators, the Greenback remains supported by higher US Treasury yields and renewed inflation concerns linked to rising energy prices. The US Dollar Index (DXY) advances above the 100 level as traders reassess the outlook for US monetary policy.

Escalating geopolitical tensions in the Middle East, particularly around the Strait of Hormuz, have raised fears of potential supply disruptions in global energy markets. Brent Crude trades near $100 per barrel while West Texas Intermediate (WTI) holds close to $95, reinforcing expectations that inflationary pressures could persist.

Against this backdrop, markets have scaled back expectations for interest rate cuts by the Federal Reserve (Fed) this year. Analysts at MUFG estimate that every $10 increase in Oil prices could add around 0.2 percentage points to US inflation, potentially delaying the continuation of the Fed’s easing cycle.

In Australia, Consumer Inflation Expectations rose to 5.2% in March according to the Melbourne Institute survey, their highest level since July 2023. The increase reinforces speculation that the Reserve Bank of Australia (RBA) could raise its policy rate again, with markets now expecting a possible hike at the March 17 meeting. However, despite these tightening expectations in Australia, the stronger US Dollar and broader risk aversion continue to weigh on AUD/USD in the near term.