AUD/USD retreats to levels near 0.6400 ahead with US inflation in the spotlight
- The Aussie Dollar gives awa¡y gains with investors growing cautious ahead of US PCE inflation data
- The Dollar lost ground on Thursday as the US Court of Appeals paused the ban on tariffs.
- Weak Australian consumption and construction data have added pressure on the Aussie.
The Aussie Dollar is retracing Thursday’s gains on Friday, with investors wary of holding large US Dollar shorts ahead of the release of US PCE inflation data. The pair, however, remains trapped within the 0.6400 to 0.6450 range for the third consecutive day.
The US lost ground on Thursday, after the US Federal Court of Appeals paused a lower court’s sentence to block most of the trade levies introduced on April 2, giving a fresh twist to the global trade saga.
The ruling reactivated fears about global trade uncertainty, amid the lack of progress on the trade negotiations with partners. This decision, coupled with the growing concerns about the US fiscal stability, has led to a steady sell-off of all US assets during the last few weeks.
Investors are trimming Dollar shorts ahead of the US PCE Prices Index release
The Greenback, however, is going through some short covering during Friday’s European session, with investors closing some Dollar short positions ahead of the US PCE Prices Index release.
PCE inflation is expected to have ticked up in April, yet with the yearly rate cooling further. Headline inflation is seen slowing down to 2.2% from 2.3%, and the Core PCE Prices Index easing to 2.5% in April, after March’s 2.6% reading.
In Australia, recent data have not been particularly supportive. Retail Sales and Building permits dropped against expectations in April, but the strong CPI data seen earlier this week casts doubt about a July cut, and is keeping the Aussie from falling further.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.