Australian Dollar softens to near 0.7150, US CPI inflation data looms
- AUD/USD loses ground to near 0.7155 in Friday’s Asian session.
- Traders raise their bets on a US September rate hike following hotter US PPI data, supporting the US Dollar.
- RBA’s hawkish comments have fueled expectations for RBA September rate increase.
The AUD/USD pair edges lower to around 0.7155 during the early Asian session on Friday. The US Dollar strengthens against the Australian Dollar (AUD) following signs of hotter inflation in the United States (US). The release of the US August Consumer Price Index (CPI) inflation data will be in the spotlight later on Friday.
The US Producer Price Index (PPI), a measure of wholesale prices and a gauge of pipeline cost pressures, rose 5.4% YoY in August, versus 4.8% prior, according to the Bureau of Labor Statistics (BLS) on Thursday. This figure came in above the market consensus of 5.3%.
On a monthly basis, the headline PPI increased 0.4% in August, in line with market expectations. The core PPI was up 0.2%, slightly softer than the forecast.
Following Thursday’s hotter Producer Price Index (PPI) release, traders raised the odds of a quarter-percentage-point increase to more than 73%, according to the CME FedWatch tool.
Traders will take more cues from the US CPI data later in the day. This report will be the last piece of the inflation puzzle the Federal Reserve (Fed) will get before making its decision on interest rates next week. The headline CPI is expected to show a rise of 3.4% in August, while the core CPI is projected to show an increase of 2.4% during the same period.
Nonetheless, a hawkish tone from the Reserve Bank of Australia (RBA) might help limit the Aussie’s losses. RBA Assistant Governor Sarah Hunter said on Tuesday that the central bank may need to raise interest rates again if inflation proves more persistent than expected, keeping alive the prospect of another hike at its September meeting.
Meanwhile, RBA Deputy Governor Andrew Hauser stated that inflation is "one big problem" Australia's economy is still facing, adding that the central bank stands ready to raise interest rates further if it believes it is needed.
Markets are now pricing in nearly a 72% chance that the RBA will raise the Official Cash Rate (OCR) to 4.60% at the next RBA Board meeting, according to RBA Rate Tracker.
RBA hawkish turn aligns with US policy preferences
Rabobank points out that the RBA’s policy stance has turned more hawkish after “Hauser [gave] a hawkish speech, which has markets thinking of hikes this month and in November.” The bank adds that this prospective tightening path is “very much what the US Treasury would like to see – plus a lot more action on non-housing parts of the economy,” underscoring the alignment between Australian policy signals and US official preferences for firmer restraint beyond the housing sector.
Technical Analysis: AUD/USD keeps a positive tone above the 100-day SMA
In the daily chart, AUD/USD holds a mild bullish bias as it trades above the 100-day Simple Moving Average (SMA), with the recent pullback still contained within the Bollinger Bands envelope. Price is hovering just under the Bollinger 20-period SMA, which acts as immediate resistance, while the Relative Strength Index (14) at 53.7 stays in neutral-to-positive territory, hinting at steady but not overextended upside momentum.
On the topside, initial resistance is located at the Bollinger 20-period SMA near 0.7165, followed by a stronger barrier at the upper boundary of Bollinger Band around 0.7238. On the downside, the first line of support is the nearby price floor at 0.7158, ahead of a more meaningful cushion at the lower limit of Bollinger Band near 0.7092, with the 100-day SMA at 0.7080 reinforcing that broader demand zone while above it the constructive tone is likely to persist.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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