The United States will report its July inflation later today. Here’s how this report could change the market’s outlook on interest rates. Analysts expect this month’s Consumer Price Index (CPI) to come down to 0.2% from June’s 0.3%. On a year-over-year basis, inflation is set to increase by a small amount to 2.8% from 2.7% last month. These changes might affect the Federal Reserve’s forthcoming September meeting deliberations on interest rates.
Core CPI, which strips out the volatile food and energy prices, is projected to increase from 0.2% to 0.3%. This much-anticipated data is already lighting a fire under the market. Year-over-year, core inflation is expected to pick up to 3.0%, up from 2.9%. That’s a notable increase, indeed – the first time core inflation has ticked upward for three straight months. Additionally, it marks the biggest uptick since February — dramatic enough to flip the economic script completely.
Impact on Currency Markets
In response to these economic indicators together with multiple rate cuts by the RBA, the Australian dollar (AUD) has plummeted against the US dollar (USD). This is much weaker than the AUD/USD pair, which is now trading at 0.6494, down just 0.29% on the day. AUD/USD meanwhile remains buoyed by support in the 0.6500-zone. Traders are looking to key shifts that would indicate a more hawkish policy turn following the release of the surprise inflation report.
If the AUD/USD does indeed drop below 0.6500, there is further support at 0.6483. Alternatively, we have resistance levels at 0.6500 and 0.6527. The current market dynamics suggest that traders are adjusting their positions in anticipation of the forthcoming inflation data, which could steer market sentiment significantly.
Fed Meeting Expectations
Today’s inflation numbers are extremely important. As such, they have the capacity to exert significant pressure on the Federal Reserve’s actions in the crucial, high-stakes September meeting that lies ahead. Looking ahead, FedWatch’s CME tool shows an 84% probability of a rate cut. This expectation is based on a new precedent. Inflation fell again under the Fed’s target band of 2%-3% in the second quarter. A surprise move higher in inflation data might change these expectations and the Fed’s way of thinking as they finalize their decision-making process.
The Federal Reserve’s recent rate statement conceded that inflation has “calmed significantly” since its peak in 2022. Core inflation is heading back up. Market participants are understandably jittery, with the prospect that any major surprises in the data may force a rethink of the monetary policy game plan.
Broader Economic Implications
The expected shifts in inflation numbers are likely to be having an impact on economic conditions more generally, affecting consumer spending and investment decisions. With inflation going through a Yoyo pattern, both consumers and enterprises will be watching economic indicators carefully to figure out how best to move forward.
The international implications of the current wave of switching AUD/USD exchange rate accordingly reflect international trade and investment flows. A declining Australian dollar increases the competitiveness of our exports by making them cheaper for foreign buyers. It does so at the same time that it raises import costs and adds to significant domestic inflationary pressures.