Australian Dollar holds gains following China’s CPI data

• AUD/USD remains stronger as China CPI climbed 0.7% YoY in October, against 0.8% expected.
• US Dollar declines despite high market expectations for a 25-basis-point US Federal Reserve rate increase.
• Solid US employment data and upcoming inflation reports may support the Greenback.

AUD/USD rises after two days of losses, trading around 0.6890 during Asian hours on Monday. The pair appreciates as the Australian Dollar (AUD) remains stronger following the release of Consumer Price Index (CPI) data from China, Australia’s close trading partner.

China CPI climbed 0.7% in October from a year ago after arriving at a rise of 0.9% in September. The market consensus was for 0.8% in the reported period. Chinese CPI inflation arrived at 0% MoM in October versus a rise of 0.2% prior, in line with expectations. China’s Producer Price Index (PPI) jumped 5.7% YoY in October, following a 5.0% increase in September. The data came in stronger than the market consensus of 5.3%.

Moreover, the AUD/USD pair rises as the US Dollar (USD) declines even though the CME FedWatch tool indicates that the odds of another 25-basis-point rate hike at the December 8-9 Federal Open Market Committee (FOMC) meeting have risen to near 80%.

Meanwhile, stronger US jobs data could potentially lift the Greenback and act as a headwind for the pair. Nonfarm Payrolls (NFP) rose by 165,000 in October, surpassing the market consensus of 65,000 and improving from September's figure of 60,000, while the Unemployment Rate nudged down to 4.1% against a forecast of 4.2%. Traders will be closely watching Tuesday's US Consumer Price Index (CPI) report and Friday's Producer Price Index (PPI) for further signals regarding the Federal Reserve’s upcoming policy decisions.

According to analysts at ABN Amro, the latest bout of financial market stress has driven a classic flight to quality, with investors “seeking safety in US Treasuries and reassessing the need for additional tightening amid financial market stress.” This reassessment of the Fed’s policy path aligns with the broader market narrative of fading hike expectations and reinforces the sense that the Dollar may struggle to draw further support from risk-off episodes if Treasury yields continue to decline.