The Australian dollar started the day quietly, but a solid US inflation release has sent the Aussie considerably lower. Currently, AUD/USD is trading at 0.7431, down 0.53% on the day.
US inflation shines
US consumer inflation rose sharply in June. Core CPI climbed 0.9% YoY, well above the estimate of 0.4% and ahead of the May read of 0.7%. On an annualized basis, Core CPI jumped 4.5%, above the consensus of 4.0% and up from the May reading of 3.8%.
The strong numbers have lifted the US dollar, as speculation grows that the Federal Reserve may be forced to tighten policy sooner and more aggressively than expected in order to curb inflation from getting out of control. The Fed has long maintained that that inflation is transitory, but the markets are likely to become more skeptical as CPI continues to surge. US Treasury yields have been falling sharply, reflecting fears that the Fed might overshoot its inflation target of 2%.
Australian business activity slowed in June, due to a resurgence of Covid cases which resulted in lockdowns in New South Wales and Victoria. The NAB index of business conditions dropped from 36 to 24, while business confidence fell to 11, down from 20 points.
Despite the drop, business activity remains at high levels, buoyed by the economy’s robust recovery. The government has been very strict in its clampdown on Covid, as the latest resurgence numbers less than 100 cases. Businesses have been able to bounce back after lockdowns were eased, so expectations are for business conditions to rebound if the latest lockdown is relatively short.
Things are looking less rosy on the consumer front. Westpac Consumer Sentiment has posted back-to-back declines, and another drop could weigh on the sleepy Australian dollar. The July reading will be released on Wednesday (00:30 GMT).
- There is support at 0.7400. This line is weakening as AUD/USD is losing ground. Below, we find support at 0.7311
- On the upside, there is resistance at 0.7589 and 0.7689