AUD/USD corrects slightly ahead of US inflation data for August
- AUD/USD retraces to near 0.6600 ahead of the US CPI data for August.
- Fed officials expect the tariff-driven inflation to be a one-off.
- Australia’s 12-month consumer inflation expectations increased to 4.7% in September.
The AUD/USD pair retraces to near 0.6600 during the European trading session on Thursday from the 10-month high of 0.6636 posted the previous day. The Aussie pair faces slight selling pressure as the US Dollar (USD) trades higher ahead of the United States (US) Consumer Price Index (CPI) data for August, which will be published at 12:30 GMT.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to a three-day high around 98.00.
Investors will pay close attention to the US CPI data to get cues about whether President Donald Trump’s tariffs are driving inflationary pressures. Lately, a majority of Federal Open Market Committee (FOMC) members, including Chair Jerome Powell, have signaled that the tariff-driven inflation doesn’t appear to be persistent.
As measured by the CPI, the US headline inflation is expected to have grown at an annualized pace of 2.9%, faster than 2.7% in July. The core CPI – which excludes volatile food and energy items – is estimated to have risen steadily by 3.1% on year. Month-on-month headline and the core CPI are expected to have grown by 0.3%.
Meanwhile, traders are increasingly confident that the Federal Reserve (Fed) will cut interest rates in the policy meeting next week.
In Australia, Consumer Inflation Expectations for the forward one-year has come in higher at 4.7% on an annualized basis in September against the prior reading of 3.9%. De-anchoring consumer inflation expectations could restrict the Reserve Bank of Australia (RBA) from reducing interest rates further.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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